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During tough economic times, Finance is a huge challenge for business owners.  In the “Going Forward” section of the January ’09 Entrepreneur Magazine, Mark Hendricks quotes some sobering statistics which frames up the extent of the recession we are experiencing. Banks have really tightened up their lending purse strings.

My best advice to meet these recession finance challenges is have a well developed Business Plan, and a Financial Strategy which effectively proves your Cash Flow Model, determining which finance sources and structures closely match and fit that model.  To accompany that Funding Business Plan, I highly recommend a solid Loan Package.  With these funding tools in hand and funding strategies highly-developed, here are some real world funding options and strategies to regard when Lenders’ purse strings become increasingly hard to access.

Increase Your Network: This is a big one and can be very effective! Work on increasing your networking groups and activities. Join morning executive meetings, chamber of commerce networking events, lions/rotary/kiwanis club meetings, business networking clubs and the like. This can be a great way to find private finances as well as find good bankers who are willing to listen to a business owner’s finance needs. Other business owners can be very helpful in your business finance quest- just need to ask! You will find that local area investors are a lot more approachable in hard times as they feel that connection to the local business community even more. Use networking to increase the odds of finding that finance mix that will meet your funding strategy needs.

Supplier and Trade Credit Finance: According to Rosalind Resuick, CEO of Axxess Business Consulting, no outside party has a bigger interest in your company’s success than your trade partners and suppliers.  Having your supplier as an Equity Partner can be very advantageous when you are having difficulty making payments or want to prompt develop a new market.  The participating Equity Stake is assigned to your past trends, present and future orders.  Start-up Consultant, Joe Fulvio, suggests your Business Plan “show not only a direct return on investment, but also the value of future business to be gained”.  By making your supplier a partner in your business, the supplier is better suited to understand your Finance needs

Lease Finance: If your cash is tight, then lease finance can be the answer. The advantages of leasing include a smaller deposit, lower payments and great flexibility. And at the end of the lease term, you can easily upgrade your equipment and roll right back into lease payments, making your out of pocket costs a lot less than a typical business loan. Carefully consider whether lease finance will meet your finance needs and have the right cost and tax structure for your business.

Local and Community Banks: Amy Loera, owner of Tio’s Mexican restaurant chain, was denied at nine different banks, for a loan to open a new restaurant, although she ran a very successful business.  These Lenders cited the Nation-wide downturn of restaurant sales due to the current recession as the chief reason for the loan declination.  There is no doubt a year ago, these banks would have lent to her.  Instead of throwing in the towel, Ms. Loera turned to a local, community lender, Arrowhead Credit Union, and she was approved for a $643,000 loan.  What was the difference?  The Credit Union was based in her business region, and she could make a strong case for the health of her restaurant chain.  Reasons Ms. Loera cited for her success in obtaining her expansion loan:

• Low overhead costs
• sensible Prices
• Family-Style restaurants picking up the slack from people by the Fancier establishments in the area.
• Smaller, localized lenders are typically in better shape during an Economic Downturn
• Community Banks are more cognizant of the local economy’s health and vigor
• Larger / Regional / National Banks are more reliant on Credit Scores and cookie cutter Applications.  Local Banks rely more on a Business Plan.
• Niche Market:  Suburban market that likes an affordable meal at the end of a busy day
• Historical Financials showing track record
• Debt-free
• 12 month Realistic Projection for the new restaurant
• Comprehensive Business Plan; every detail about the business
• Received approval from the Credit Union due to:
  • Experience
  • Existing locations cash flowing well
  • Affordable meals in a recessionary environment
  • Detailed, well-thought-out Business Plan

– What the Local Bank Looks For…The Inside Story…

• Not Credit Score Driven
• Look behind the scenes of the business
• Cash Flow is Key:  An important indicator of the ability to pay off the loan.
• Believable, forward-looking Cash Flow Projections for the new business.  Realistic Financial Statements.
• offering Best & Worst Case Scenarios on your Financial Projections
• Small, Community Banks assess a business loan on a case by case basis.  This is a huge advantage over Regional Bank Loan decision making, especially, in an economic down-turn.
• In recessionary times, certain industries will be hit harder than others, like Construction Companies or Auto Dealerships; therefore, it is very important to have a well developed Business Plan and a forward looking Strategic Plan that includes a well researched 12-18 month industry outlook, based upon a believable Marketing Plan.
• Small Bankers can see successful pocket areas in a struggling local economy.  These pocket areas often have a Strong Niche Marketing Offering
• Financial problems are best disclosed to the bank early on so a mutual solution can be implemented
• Small Banks do loan to Companies showing past financial “hiccups” if they can show they were proactive and overcame the issue

Consider hiring an experienced Business Consultant to develop that Business Plan and Loan Package that will help you obtain finance in this tough lending market. It is money well worth spent and make sure your business consultant has a background and experience in business finance.

About the Writer – Frank Goley of ABC Business Consulting

Frank Goley is a business consultant, business turnaround consultant and business plan consultant for ABC Business Consulting. Frank is considered an expert in writing, developing and implementing business plans, business turnaround plans, business funding plans, marketing plans, strategic plans and web marketing plans. Frank offers comprehensive business consulting, business coaching, business turnaround consulting, along with web seo, web development and web marketing consulting, to small and medium size companies. Frank is the author of a business plan book, The Comprehensive Business Plan Workbook – A Step by Step Guide to Effective Business Planning, and he has over 50 published articles and e-books on business success strategies. He also writes the Business Success Strategies Blog.

Let us examine the different types of income. They are:

1. Earned Income    -   obtained from working for someone or a company.

2.  Passive Income   -   income generated from business.

3.  Portfolio Income -   income generated from investments in paper assets.

Earned Income comes from having a job in a company or in someone else’s business. You get paid for your time and services rendered. The income an employee can generate from working for an employer is limited. There is the possibility that an employee may devote extra effort thinking the employer will pay him/her more.

Although, it’s a rare possibility for the most part, when the going gets tough, but even then, it’s still possible. . And even if it happens, it is still limited. When there is additional profit gained by the employer as a result of the employee’s extra effort, the employer will get the bigger “slice of the pie”. You are indirectly making someone else rich through your added effort. It is a good act but it is also a fact. It’s likely that you will be telling yourself mentally: “Hey, that’s not fair.” Fair or not, that’s the way life is, when you work for money.

If you are an employee, you get your money or paycheck after everything else. It is earned income, less taxes and everything else deductible, before money reaches your hand. And if ever the money reaches your hand, the next place it is bound to go is to pay your bills. If the amount is not enough, you are bound to borrow, which makes you debt-ridden if it accumulates. Now, this is one big mistake. Don’t ever get debt-ridden. It is the shortcut to poverty.

Earned Income is a safe way to generate an income. There is not much thinking to do. Except for a few high paying, high profile jobs, your work is mostly concentrated on a few things where you keep repeating the same functions. Unconsciously, this discourages creativity, so boredom starts to set in. It is due to this boredom that getting to work every morning is such a drag and you look forward to weekends, holidays, and vacations.

Unless you really love what you do without consideration to the income it generates, or unless you are highly paid, or unless there is a lot more to learn in your job, or unless financial security is of no importance to you, there is no reason for you to stay long in the “rat race.” The earlier it is to get out of the trap, the better chances you will start creating wealth.

Passive Income is generated from businesses. You can sell products or offer services, or a combination thereof. Examples are buying/selling real estate, trading merchandise as in wholesaling and retailing, etc. In many instances, you need not be physically present in your place of business. There are also small businesses like vending machines where you hardly require an employee to visit those machines for refill (since you can do it yourself). You can also go with franchising; either be a franchiser or a franchisee. The list is endless as long as you do what you love to do.

The beauty of going into your own business is that you work for you, not for someone else. You enrich yourself, not someone else. Your time is disciplined but more flexible because you can set your own schedule.

Another advantage of going into business, especially in your own corporation, is that you earn and spend before tax is deducted, unlike being an employee where you are taxed before you spend.

Portfolio Income, just like passive income, is making money work for you. Portfolio Income is generated from paper assets like bonds, stock market, certificate of deposits, and mutual funds. They are called paper assets because literally, they are businesses that revolve on papers. It is in portfolio income where financial knowledge is of vital importance. Your intellect combined with creativity can make you rich or ruin you.

It is best to have a combination of the different types of income. For example, if you are an employee, it won’t stop you from making passive income on the side by building your own business through MLM. At the same time, you can invest the money from your passive income in stocks and generate portfolio income.

Set the combination that you are comfortable with and which is within your means. Having a diversified income source means you have more avenues to create your own wealth.

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