Utilizing Financing as a Small-Business Owner


If you are a small to mid-size business owner, you likely have or will need to obtain capital through business financing. Using business financing is a typical milestone for most small businesses – 43 percent of small businesses applied for a loan in 2020.

Knowing how and when to access financing is essential to growth. Unless your balance sheet matches that of a Fortune 500 company, you’ll need a loan to expand operations, whether that involves hiring more staff, purchasing more inventory or selling to more clients. Development means new challenges, unexpected obstacles and plenty of complicated problems to solve – and you can do it with help from a quality lender.

Taking money from the wrong source, for the wrong reasons or at the wrong time has consequences – losing part of the company or being trapped by repayment terms that stifle future business growth.

Preparing for the future: an outline

To guide you on the financial journey, what follows is an outline for leveraging financing effectively, so your company can prepare for the future.

Objectives: When making and evaluating financing decisions, deliberately consider your business objectives by answering the following questions:

  • Objectives: What are the business objectives and goals?
  • Purpose: What is the purpose of the funding? Will it be used toward the outlined objectives? Some answers include more inventory, scaling, smoothing out seasonality or cash flow and acquiring new business.
  • Timeline: What is the timetable for utilizing the funds?

Resources: It’s crucial to examine the collateral the company has to leverage. Consider how many accounts-receivable invoices the company has, and what business assets the company owns.

Challenges: One of the highlights of entrepreneurship is that no two days are alike, each offering a new challenge. With this in mind, realize that your business will face unforeseen obstacles, impacting business objectives. Evaluate liabilities or areas where the company may have snags like delays, increases in costs or economic factors like rising inflation or a pandemic.

Preparing business objectives, resources and challenges before obtaining financing will help in working with a financing partner. That right partner will advise which financing option is best, maximize the value of financing and mitigate potential problems.

Two primary financing options to consider

Now, let’s take a look at some financing options: accounts receivable financing and asset-based lending.

Accounts receivable financing (factoring) – Accountsreceivable (A/R) financing, also known as factoring, leverages unpaid accounts receivable invoices as collateral for a revolving line of credit. Companies receive payments – in as little as 24 hours – worth the majority of the invoice value. The financing partner then owns the receivables and collects on them, so payment deadlines and collections are seamless. Leveraging A/R financing shortens the timeframe for receiving payments, and this kind of financing accesses money already owed for a small fee.

A/R financing is valuable when customers’ pay schedules are longer than average. It’s flexible. Companies can choose which invoices they want to use as collateral, so it’s flexible to cash flow needs. A/R financing is excellent for evening out cash flow, decreasing working capital issues or funding a larger project in the short term.

Asset-Based Lending – Ifflexibility is a priority, asset-based lending may be the solution. Asset-based lending offers more latitude than the standard business loan because companies can leverage various business assets to fund the company’s initiatives. Assets for collateral could include accounts receivable, inventory or equipment. Loans using tangible assets as collateral typically receive lower interest rates than unsecured loans, making the ROI on a loan easier to achieve.

Financing partner case study: Kids Preferred

When securing financing, choose a partner who knows your particular industry and has worked with and provided loans to your peers. This experience is key to understanding your company’s unique challenges.

The lender should design a tailored solution to your business’s operations – scaling up or down as needs change. Lenders may advise changing loan types as the company’s situation changes.

Consider banks or lending providers that offer the following:

  • customized solutions and personalized setup;
  • competitive rates;
  • funding timelines;
  • dependable customer service and support; and
  • reliability to help company executives make decisions.

What follows is just one example of how financing can help a company through the ups and downs of the retail industry.

Kids Preferred, a children’s toy manufacturer/importer and distributor, operating in a highly seasonal industry with long inventory lead times, turned to TAB Bank in 2013 to fund its working capital requirements.

According to Bill McHale, COO/CFO of Kids Preferred, TAB Bank not only provided Kids Preferred with an asset-based line of credit to fund its working capital needs, it also provided additional flexibility to supplement contributions made by the company’s managing member to help the company overcome huge operating losses in 2013 and 2014 and aged and excess inventory issues in 2015.

TAB Bank continued to support the company in 2016 and 2017 as it rationalized its cost structure and worked through its inventory issues. TAB Bank also provided the liquidity and flexibility needed and even advised the company as it weathered the 2017 and 2018 bankruptcies of a leading global retailer, an event that impacted the entire toy industry.

Most recently, TAB Bank again provided timely financing to supplement PPP funding and new contributions made by the company’s managing member that enabled Kids Preferred to navigate through the 2020 Covid pandemic and subsequent 2021 and 2022 supply-chain disruptions.

“In its more than 10-year partnership with Kids Preferred, TAB Bank has demonstrated a unique ability to recognize business cycle issues and ‘Black Swan’ events and the business savvy to provide creative and valuable solutions,” says McHale.

Tyler Heap

Financing allows companies to expand their reach and potential, achieve their goals and prosper. Choosing the right partner can make all the difference, using the financing experience as a necessary stepping stone to future opportunities.

Tyler Heap is the Chief Credit Officer at TAB Bank. He is responsible for leading the underwriting, special assets, and collateral monitoring teams in conjunction with managing overall credit quality at the bank.