Almost every speech and educational session at the 2011 IFA convention mentioned the current credit issues, and how they continue to plague the franchise industry. Whether it was start-up financing, equipment financing, or simply working capital*, the general consensus was “the money is out there, but no one is lending.”
As a direct franchise lender, we can safely say: That simply isn’t true. What is true is that the rules of the game have changed, and that there are more hurdles to get to the money, but it’s still accessible.
While listening to Steven LeFever of Business Resource Solutions speak on increasing profitability, he made an observation that’s almost so obvious that everyone never thinks about it:
Small business owners spend so much effort to hide profits in order to avoid taxes that they never stop to realize that they need to show profits in order to obtain credit.
Profits have three purposes:
- Reinvestment – Purchasing new property, plant, equipment, and inventory, or increasing payroll.
- Distribution of Wealth – Whether paid out as a trip to Mexico or as dividends, profits may be distributed to shareholders.
- Servicing Debt – Once operating expenses are covered, profits can be used to repay credit.
Lenders, especially in these tight times, need to see profits on your books. If you have worked with your accountant to eliminate taxes, you’re making it impossible for any lender to safely give you credit. Steve actually joked that small business owners tend to keep 4 copies of their financials: the real numbers, the numbers for the IRS, the numbers for the bank, and the numbers for their ex-spouse.
Outside of showing profits, Steve had a list of 14 financial ratios that he felt were the most important to a small business owner. Included here were the basic ratios, including the Current Ratio, Quick Ratio, Margin, and Inventory Turnover. These figures can quickly give you, and any potential lender, a snapshot of your business efficiencies. As the saying goes, “you can’t manage what you don’t measure.”
At the end of the day, the banks and lenders need to mitigate their risk. By showing profits, and understanding the financial position of your company, you’ll suddenly find that lenders are much more apt to release the funds you need to grow your business.
Featured photo credit to guitargoa at http://www.sxc.hu/photo/1239215
*Working capital not available in the following states: AK, DE, ND, VT