Two repayment methods are traditionally used to retire a loan. The preferred way is the primary repayment method, where the borrower pays off the loan from the cash flow of the business. The secondary method is the avenue of last resort, where the lender liquidates the collateral that was used to secure the loan.
When a business has few or no fixed assets, there is such limited collateral that the lender often rejects the loan request or looks for alternative ways to improve the application. Educated borrowers can help themselves by knowing what lenders look for.
LICENSED TO BORROW
Many lenders consider professional licenses and
degrees as a form of collateral. Designations such
as MD, CPA, DVM, OD, or JD after someone's
name represent an expertise that has real market
value. For the lender, that translates into bankable
skills that have immediate cash flow potential.
CASH FLOW VS. COLLATERAL LENDERS
No two lenders are alike. For businesses that lack fixed assets to secure a loan, the lender of choice is the cash flow lender that will finance
business or profession based on anticipated cash
flow. A collateral lender generally puts more
weight on the value of fixed assets.
BE CREATIVE
People are often surprised to discover that
financing can be a creative process. The key is
to help a lender by exploring ways to make the
loan work. Give the lender options: For example,
look at strategies of increasing cash flow or determine what personal assets can be committed to
the deal. That gives the lender more tools to
craft a solid loan package.
BORROWER EQUITY
Whether it is a new car, a house or a business,
the greater the borrower equity, generally the
easier it is to get financing. Consumer lenders
call it the down payment; commercial lenders
call it equity or cash injection. The more cash the
borrower brings to the table —particularly if the
borrower is a non-fixed-asset business —the
more likely the lender will say “yes.”