Taking a Business to the Next Level – Part Two: The Importance of Loan Structure and Borrowing for Current Assets vs. Long-Term Assets

Many times, the entrepreneur who started the business is not a finance person. His/her expertise lies in sales or production. Successful business owners hire strong people in their weak areas and when it comes to securing business financing, knowledge is power. Probably nothing demonstrates this more than when non-finance owners look for business financing.

At Celtic Capital, we often get requests for a loan structure outside the owner’s business model. That’s because typically, the business is short on cash and the owner wants to borrow on everything. The focus is on getting the most cash possible at the lowest cost. This, however, is not always in the owner’s or the business’ best interests.

When a lender proposes a specific loan structure, the business owner needs to take that proposal and put it into the company’s internal cash flow projections to make sure that if he/she accepts the facility, it meets the business’ needs. Most people look at cash flow historically but it’s important to look at a loan structure in relation to cash flow going forward. Will the facility pay off needs today? Does it provide enough working capital today? Does it provide enough capital to achieve projections going forward? And what if the proposed structure doesn’t work? Can the lender tweak it or will the owner need to find more money elsewhere?

Looking at the loan structure in relation to the cash flow of the business is critical. And when setting up a loan structure, it must align to the business model. To do that, owners need to look at the various asset classes. Businesses have both current and long-term assets.

Current assets (accounts receivable and inventory) should be used to finance current needs. A revolving line of credit is used for current needs as they generate cash to pay back the loan which then allows repeat borrowing. Longer-term assets (equipment and real estate) require a longer-term structure because they’re not generating cash so the debt shouldn’t be serviced on such a fast basis.

Many times business owners don’t look at the loan structure in relation to current and long-term assets and needs, and use the borrowed funds for whatever they need. If that’s the case, they could be paying more interest than they have to. Borrowing against equipment and real estate amortize monthly, but typically carry a lower borrowing cost (albeit for a longer loan life) while borrowing against accounts receivable and inventory may have a higher cost but are repaid much quicker. While the rates may be lower with one type of loan, the dollar costs are higher due to the longer term. That’s why it’s so important to make sure a loan is structured around how the business operates – to keep borrowing costs as low as possible.

About Celtic Capital
Companies looking for working capital to cover operating expenses, fund growth, increase buying power and take advantage of vendor discounts and rebates turn to Celtic Capital. With an appetite for the more complex transactions, Celtic Capital has a history of success in crafting creative, flexible asset based financing solutions from $500,000 to $5 million with no financial covenants.

As an independent lender, working with companies nationwide, Celtic Capital is willing and able to alter price and deal structure and expand lines of credit to handle its clients’ increased revenues; and when cash flow is an issue, will look toward providing an inventory facility to help offset lost cash flow.

If you know of, or are, a business in need of non-traditional financing, contact Mark Hafner at 800.742.0733 or mhafner@celticcapital.com, or visit us at www.celticcapital.com.