I recently worked with a client seeking financing from their business where the business is well established, has an excellent balance sheet, and is very profitable. The Owners were experienced, established, and had a solid track record of performance.
So why were they looking for financing?
Their primary and only institutional lender could no longer underwrite the type of business they were in.
In the current economic climate, this is becoming a more and more common occurrence for even well established small businesses.
For this particular client, they were actually able to secure better business financing than the package they had.
But while you might think the debt financing could be easily replaced given the financial strength of the business, this is not always the case. For this particular client, while the end result was positive, there were not many interested lenders at the very point in time they required financing. And with the institutional lender they are working with now, there is no guarantee they would have done this deal 6 months ago, or would considering doing it at all 6 months from now.
The point here is that business financing can be all about timing where the needs of the business need to line up with the needs of a lender.
And even when everything lines up, there is no way to know how long that relationship will continue. As a business owner, you have to always be prepared with plan B in the event that a lender changes their business model or portfolio focus and leaves you as the odd man out, even though you’ve never missed a payment and have complied with all the lender requirements.
So the second takeaway from all of this is that as a small business owner, you always need to be on the look out for a better source of financing and an alternative source of financing. There is no true loyalty in this game, and for the most part it is a game in that both borrower and lender rarely disclose everything to each other in terms of their go forward business plans, leaving a certain amount of uncertainty in play.
Unfortunately, most business owners or managers only focus on business financing when they need money. Because of the “point in time” aspects of business finance, this can be a very dangerous and expensive approach to take.
Even for the most well established and profitable businesses out there, if they still rely on third party financing from lenders or investors, they always need to be asking themselves “what do we do if the lender or investor want their money back right now?”.
By proactively staying on top of the market and your relevant options, you stay ahead of the curve and ready to deal with the unexpected.