Capital project financing includes the projected income stream as repayment. Fluctuations during start-up, initialization, production, and sales are unpreventable but tolerated within margins. We have to smooth the peaks and valleys into a steady line, preferably up and to the right.
Sales and revenue peaks need no solution; they are the solution. It’s the troughs we meet, discuss, and plan to prevent or right. Setting clear priorities will stretch your working capital to drive earnings. The available financial instruments for corporate lending fall into a few categories.
- Amortized loans are designed for lender success. They are useful for minimizing payments over long periods, but we sacrifice the front loading of interest, delaying principal reduction. Applying yield apogees to direct principal payments can dramatically reduce loan length and investment cost through interest. SBA and working capital loans are two examples.
- Equipment financing is an asset-based loan and can be used to upgrade production or technology to scale your production. Keep your cash, lease equipment from the vendor, or borrow against the knowing the increased capacity will scale past the financing load.
- Strata Finance uses annual revolving credit lines. They allow for multiple draws from available funds as needed during the contract period, which is usually one year. During a slump in revenue, you can draw to cover operating costs. Payments are consistent and when the market adjusts in your favour, you can remit the principal.
- Business lines of credit are similar to revolving credit; however, the industry standard terms are much longer. Payments can be interest only but drive that principal down to stop the bleeding as soon as sales allows.
- Australia has 592 grant programs. Get familiar with which tools you have access to at business.gov sites. Any opportunity to use their money is worth reading up on.
The standards of lending do not alter much. The debt-to-income and loan-to-value ratios can be compensated with a down payment or other forms of equity and security. The farther you get from standard loan programs the more interest you will encounter.
Be prepared for financing fees that trend with the normality of your loan program. Initial processing fees should be included in the final fees assessment unless otherwise stated. Increased interest, fees, and payments will be assessed as defaults or failures in contract fulfillment happen.
At your upcoming general or executive meeting, you can arrive with answers to difficult operations or funding questions in your mind. Be prepared to outline recommendations for ironing the oscillations of annual and seasonal sales into that smooth line that keeps climbing up and to the right.
Lender comparison is possible with standard loan products and terms. Atypical lenders provide non-standard loans to fit the markets outside of the neat and pretty programs banks like to handle and sell-off.
A bank has to sell your loan before they make it. They don’t have the cash to support all their lending. Creative lenders are generally internally funded and do not need to meet stringent requirements the secondary market makes banks exceed. Large, short-suspense problems demand innovative solutions. You need a lender with business understanding, not a regimented bean counter.
