Business Financing Sources Are Moving Targets

Business Financing Sources Can Be Hard To Pin Down

Most things you try to acquire have some type of regular and predictable supply. Some products and services are readily available while others may require lead time to order or restock. And even if someone goes out of business, there is typically another vendor to work with.

Furthermore, process for acquiring a product or service, the terms and conditions of use and so on, also tend to be easy to locate.

If it was only so easy when it comes to securing capital for your business.

While the vendors may be easy to recognize, the process for acquisition and the determination of availability may be very difficult to figure out.

Lets looking into the key reasons why.

1. Sources of business financing get the majority of their capital for lending or investing from other sources of financing, which can be further leveraged down the line. If the “up line” sources reduce supply or increase the costs, there is a trickle down effect that is very hard to predict at a local borrower level. Sometimes retail lenders are shut down completely because of a major source no longer extending supply.

2. Capital providers manage a portfolio of placed accounts. Portfolios are continuously adjusted based on the economic outlook for different sectors. If a particular sector is becoming too large a part of the overall portfolio to create “risk imbalance”, then the capital source will stop providing new funding for that sector and may even call in loans or sell off what would normally be considered a well performing asset to reduce concentration.

As an example say that a business owner or manager requests construction industry financing in January from a preferred lender and that financing is approved and disbursed. If the exact same request was made 6 months later, there is no guarantee that an approval would be forth coming, which could be based on the industry, overall portfolio risk, and so on. Supply is not going to be constant.

The rules aren’t constant either. Perhaps the same request 6 months later can still get approved, but more security is required or a smaller percentage can be approved, or tighter terms and conditions accompany the approval, or rates are higher to reflect a higher perceived risk.

Total moving target.

3. Humans are involved. While financial companies providing capital have policies and criteria to follow, the decision making process is managed by individuals. When the individuals involved change, the decision outcome can change… even though nothing else may appear to change from one deal to the next. Even if personnel doesn’t change, many lending organizations operate with a rotating desk of underwriters who are assigned applications at random. All things being equal, different underwriters can come up with different lending or investing decisions on the same file.

4. Economic outlook. At the time of writing, we are near the end of 2009 and still in the middle of the current recession. Many business financing sources continue to build their cash reserves to protect themselves against any potential losses that may occur in their portfolio from recessionary impacts. This is quite ironic in that their exact action of building cash ends up shrinking the money supply and creating the exact effects they are trying so hard to guard against. In these situations, supply of capital is not the issue … willingness to supply is.

5. Time Of Year. A financial organization that provides capital for loans or investments operates as a business within an annual business cycle like any other business. At the beginning of a fiscal period, lending criteria tend to be quite tight as organizations see if they can acquire lower risk assets. If by the second quarter, the “placement numbers” are off, the criteria can get loosened up to help meet targets. As the end of the fiscal period draws near, nothing but low risk loans or investments will be considered if the company has already achieved its budget. The opposite would take place if the budget still had to be made.

So when you’re looking to secure business financing, regardless of your previous experiences, remember that your success will always hinge on how all of the above comes together at any point in time. Put things off a couple of months and the rubics cube could look totally different.

About the Author Brent Finlay