Seek help immediately.
Thats Lynne Hingtgens advice for small-business owners who are struggling with money in the lean economy.
Hingtgen knows from experience as director of financial services for BuildPro Construction, a 10-year-old Raleigh company which primarily provides drywall and paint services to four national and regional residential construction companies.
We were very successful for many years, and we were able to manage all that coming and going, she said. But 2011 hit the company hard, she said, and the business cut prices to stay competitive.
Unfortunately, materials and our labor did not decrease, so our margins got skinnier and skinnier, she said.
Hingtgen and owner David Leach ended up putting their focus on cash flow instead of profit margins, and started getting behind in payments to their suppliers, she said.
In response, BuildPro turned to Raleigh SCORE, which helped counsel the company operators through cost reductions and negotiations with suppliers and customers. SCORE also connected the business with The Support Center, a statewide nonprofit and Community Development Financial Institution that provides small-business loans and financial training to new and existing small businesses.
Once we put our nose to the grindstone, it went quite well, Hingtgen said.
Loans on the decline
When people turn to Raleigh SCORE for help, financial challenges are involved about 50 percent of the time, said David Grant, president of the Raleigh and Durham arms of the nonprofit organization that offers free counseling and low-cost education workshops to startups and small businesses. However, recent studies indicate that small-business lending has been decreasing over the years.
The total value of small-business loans outstanding from banks or credit unions that lend was $587.8 billion in June 2012, which is $19 billion less than in June 2011, according to an annual Small Business Administration lending report, which classified small-business loans as those less than $1 million. The decline slowed from 6.9 percent in June 2011 to 3.1 percent in June 2012.
This smaller drop in the value of small-business loans suggests that although small-business lending terms and standards are easing, standards remain fairly high, the report states.
However, information from the National Federation of Independent Business suggests that small-business borrowing needs continued to be low in 2012, the report states.
Stop for a second
Funding includes debt financing, which involves borrowing money, and equity financing, which gives an investor a portion of the company.
In general, small-business owners who arent interested in releasing control of their concept or company will seek debt financing through a bank, which often requires a 30-percent match, or by borrowing from friends, relatives and suppliers, Grant said.
Grant said owners of young businesses can improve their chance of receiving funding by being realistic about how much money they need.
They really need to go in with the least amount of money they need to borrow and prove what they are doing, Grant said.
Owners of established businesses should consider reaching out for help when they face changes in their business, such as an increase or a decrease in sales, a product becoming obsolete or a rise in the cost of materials.
Raleigh SCORE helped BuildPro operators stop for a second, Grant said, and figure out how to move forward.
So we changed, in some ways, how they were looking at where theyd come from, and really started to spend some time on where they think they can go, in terms of future cash flow, Grant said.
Some options for businesses in a similar situation include selling receivables to a person or an entity that is interested in making money on the interest, along with turning to customers and suppliers for lines of credit, loans or better payment options.
Quite often there are lots of negotiable terms that people can look at to help ease them through time, Grant said. You can work both ends of the spectrum, as far as trying to have your customers pay you in a shorter space of time or elongating the time it takes to pay your suppliers.
BuildPro reduced office expenses by about 5 percent, let go of two of their 17 employees, stopped doing business with two customers who werent willing to pay increased costs, and negotiated cost reductions and payment plans with suppliers. Strong relationships with lenders, suppliers and customers were essential to the process, Hingtgen said.
BuildPro also successfully sought a 10-year SBA-funded loan from The Support Center, which seeks to lend to businesses with than less $5 million in revenue. Most of The Support Centers loans are between $5,000 and $250,000.
We like to call that our sweet spot because that tends to be the range dollar wise that banks taper off, said Roberta McCullough, the centers vice president of business services and operations. So we found that there is a huge need in that particular dollar range.
Before small-business owners seek funding, they will need an up-to-date business plan and a clear understanding of how much they need and know how they will use the money.
A lot times we have to work with borrowers to get to that number, McCullough said.
With the exception of one loan product for veterans, The Support Center requires a cash injection of 10 percent of the total project cost. Planning is key, McCullough said, and owners should allow time for the application process and not wait until they need to prepare for a new project.
BuildPro used 95 percent of its loan for debt consolidation and to pay their past-due bills, and the rest was used to fund the mobilization of a new job.
I am not going to say we would a have been out of business without this loan. We would have had to downscale to a mom-and-pop organization, Hingtgen said. That would have meant we take this business down to two to four people.