This is obviously a good strategy if you can qualify for lower interest rates as its going to save you and your business money.
But what they fail to take into account when making these sorts of inquiries is the potential work involved and the time it could take to accomplish this objective.
First of all, the providers of cheaper money automatically fall into the category of lower risk lender, which means that they are going to take their time making lending decisions, that they will have considerable lending/funding requirements to meet, and that they will perform or require considerable due diligence on each and every deal that they consider.
So assuming that you or your business could qualify for cheaper money, its going to take time to get it into place.
If you have a timeline to hit in the future where an interest term on existing debt is coming due or you will have a commitment that will require incremental capital, you would be well advised to start the financing process at least 90 days ahead of time.
Once again, this is assuming that you would qualify for this type of financing.
So before investing time and money into a lender’s application process, the first units of time should be spent finding out what you can qualify for.
This can be done on your own or through the help of a business financing specialist.
This assessment process requires a review of your financial and credit profile which can then be applied to the basic lending and funding criteria of individual lenders or groups of lenders.
For instance, while not exactly the same, most “A” lenders will have very similar lending/funding criteria. And while understanding whether or not you fit a lenders criteria is going to be important to determine if and when you should apply for cheaper money, equally important is knowing what lender or lenders are also interested in the type of application you are putting forward.
Commercial lenders are continually “in and out” of the market all the time for certain assets, applications, industries, and geographies, or some combination of these as they work to maintain a balanced risk portfolio. So even if you can determine that you can meet a certain lender’s funding criteria there is no guarantee that they will be able to grant you funding at any particular point in time.
After performing the initial assessment, you may discover that you do not qualify for the type of financing your after. At that point, the financing exercise is about investing time to get your business in a finance-able position by addressing the areas that would cause you do be declined by lower cost lenders.
All of this takes time, and in many cases more time than you can imagine.
But being able to secure lower cost money can also be a considerable saving to you and well worth the effort.
If you’d like to find out more about your available commercial financing options, I suggest that you give me a call and we’ll go over your situation and requirements together.
The question largely is which process do you follow?
This needs to be answered in a couple of different ways.
First, all business financing processes can be classified into one of two different categorizes.
Process #1 we will call the off the shelf business financing process while process #2 is a customized approach.
With process #1, the lending institution has a product or program that they provide on mass that has very specific requirements and a process to follow. The off the shelf process tends to be very rigid in terms of the requirements and therefore is not very pliable with respect to being able to adapt to an application that does not meet the stated requirements.
To get business financing from an off the shelf program, you may need to adjust or adapt your requirements to fit the lender. While this may seem counter intuitive to a business owner, the reality is that swimming against the current with these well defined programs will not likely get you anything but frustration and a lack of funding.
Process #2 is a customized business financing process.
Now this is where things get really interesting.
Customized processes are typically provided by private investors that will consider a wide range of debt, equity, and debt/equity scenarios.
The process for trying to arrange this type of financing will also typically involve some type of intermediary or front man for the money that brings deals forward to the private investing group.
This can be done through a formalized system like investment banking, hedge funds, or even IPO’s.
Every financing strategy that is pursued will have to be vetted through a chosen group of advisers which will likely include lawyers, accountants, business consultants, and even boards of directors.
The big challenge with the customized business financing approach for the borrower or applying entity is that the process costs money to pursue and the outcome is uncertain as the process will ultimately dictate the outcome.
This is also why most business owners spend most of their time working with process #1 in that the path to money is typically more clearly defined.
That being said, even though process #1 can provide a road map to money, there still is no guarantee that you will get the money you’re looking for if you follow it.
So regardless of whether you choose to pursue process #1 or process #2, the are no guarantees that one will be more successful than the other.
So getting business financing in place is more about increasing or maximizing the probability of success which will occur when you 1) select a process that is highly relevant to your requirements, and 2) stick with the process long enough to achieve the desired results.
In terms of point #1, it can take some work to figure out who’s process to follow and who you should be working with. There are all sorts of intermediaries making all sorts of claims out there and it can be difficult to choose a path that increases the probability of success just as its very easy to get sucked into the promises of a low probability gig that says all the right things, but is lacking in terms of substance and the ability to follow through.
In terms of point #2, because business financing in general takes time to complete and can be frustrating to complete, its easy to jump from one process to another without getting the desired benefit.
The goal in seeking business financing is not to secure optimal financing in my opinion, although that can be a secondary goal.
The primary goal is to secure financing that works within the time period you have to arrange it and then work to improve upon your balance sheet over time once you have capital in place to do the things you want to do in your business.
So selecting a solid and relevant business financing process and then sticking too it are going to be keys to getting the financing you are looking for.
The question as to whether or not you should consider paying these fees is a difficult one to answer for a number of different reasons.
On the dark side of the equation, yes up front fees are a perfect opportunity to be scammed by either someone who has no intention or ability to provide you with business financing capital, or someone who may place some money to legitimize their offer, but provide very little chance of funding once the money is paid.
On the flip side, there are lots of ways to look at fees prior to funding.
Most of the major banks will not charge any fees to perform the initial due diligence required to get to a commitment stage. But its not uncommon that a commitment fee is going to be charged and there could still be a number of conditions in the commitment that still need to be covered off before you see any money. So is this an up front fee or not?
Another lender strategy in the commercial financing space is lender commitment to the process. The lender will provide a term sheet for funding with conditions early on in the process and will continue on towards a funding commitment and actual funding if a deposit is paid when the term sheet is signed back.
The rationale on the part of the lender is that 1) the borrower is showing seriousness in their application as compared to shopping it all over the place with little chance of follow through; 2) if any third party support items are required, the lender will commission then directly and pay then out of the deposit; and 3) if the deal cannot be funded, the deposit will be returned less any outside costs incurred by the lender.
The alternative to the above is that the lender asks the borrower for different third party reports, which the borrower has to pay out of their own pocket and provide to the lender anyway. The only real difference is does the borrower pay the costs directly or indirectly through a deposit.
There are also alternative lenders placing investor funded money that want to have their time paid for when considering any deal. These groups tend to be smaller organizations in terms of head count and want to cover their operating costs when assessing any deal. The rationale here is that because they are assessing alternative financing deals that could be some form of debt/equity combinations, the amount of deals they may have to process and the time required to complete a deal may be substantial and difficult to cash flow from success fees alone.
And regardless of how much a borrower may dislike paying upfront fees, the process of going through an application and trying to get it funded does take time and resources. Many will argue that external costs should be covered by the borrower, but internal costs should be born by the lender, investor, or intermediary.
There are many different points of view and sides to the different financing fees charged.
So what’s the right answer with respect to paying or not paying up front business finance fees?
As mentioned above, in many cases there are many forms of up front fees that you would not necessarily consider as such that are charged every day by national branded lenders.
The key point I’d like to make is that financing fees are a business expense if you choose to pay them and you may not get access to funds without paying them prior to funding.
Like any business expense, its important to pay for value and to do enough homework to know that you are paying the costs for someone that could truly help you versus someone that is just projecting help in order to collect fees.
Further, also remember that just because you paid an up front fee doesn’t guarantee you funding. There are lots of online message boards where individuals cry foul and scam when no such thing took place.
The scammers are going to prey on the desperate, promising things no one else is able to provide, sounding like the “very thing” you were looking for.
And legitimate sources of business financing will take upfront fees, perform their full due diligence and not fund the deal also.
So it can be very difficult to assess good from scam and its very much a buyer beware world out there when it comes to paying upfront fees either right at the beginning of the process, or somewhere down the line before funding will take place.
Not being prepared to pay any type of upfront fee in any situation can limit your business financing options considerably as well so weigh the pros and cons carefully before making a decision one way or the other.
So what do I mean by the proper mindset?
I’m referring to a perspective whereby your focus going into the business financing process is that 1) its going to be more difficult that you think; 2) its going to take longer than you imagined; and 3) the process will take unexpected twists and turns.
This goes along the lines of prepare for the worst and hope for the best, and if the business financing process goes better than expected, then so much the better.
But assuming it will go well from the outset is potentially setting yourself up for failure.
Because most business financing processes are difficult.
Why are they difficult?
Its a hard question to answer in one sentence but essentially the more people that are involved in the process, the greater the chance for delays, misunderstandings, incorrect assumptions, personality conflicts, and subjective assessment that does not go your way.
So to increase your chances of success, going in with the right mindset can help you stay sharp, make sure things are not slipping into unnecessary delays, and basically not allow you to take anything for granted and to always remember that its not over until funding is fully completed.
If you’re like most business owners or managers that have not experienced the dark side of business financing, then you’re probably thinking that I’m exaggerating.
All I can tell you is that in 25 years of working on business financing cases, it is rare that I see a deal that is approved and funded without some twist, turn, or delay.
Here are a few examples from just this year …
The application process moves to the commitment stage, just in time to fund the deal in the time period available, when the lender adds 7 new conditions into the final commitment without previously bringing them up. It became impossible to meet the conditions in the time remaining to close the deal and the deal was lost.
For a business refinancing case, the applicants accountant promised to provide completed financial statements by a certain date 6 weeks into the future. When the date came, the accountant had not yet started working on the financials, the existing bank pulled their facility and gave the business 30 days to pay them out before the bank closed the business account and started to realize on registered security.
Unfortunately, these types of situations are more common than not. Sometimes we can work our way through them and some times we can’t. One thing that always helps is having more time to work with and staying on top of all those involved to do their part in a timely fashion.
As I have said several times in other articles, business financing is very much about applying at the right place at the right time, but its also about having the right mindset for even when you are at the right place at the right time, things can still go wrong and you need to be able avoid the problems that can be avoided and quickly solve those you can’t see coming.
In the end, business financing is both art and science which is also why working with a business financing specialist can many times get you through the financing process in the time you have to work with.
One thing that business owners and managers have a hard time understanding is that business financing or commercial financing is not very pliable or flexible or even predictable and getting funding arranged that is within your strike zone or acceptable to you is or should be the primary goal versus trying to get the best deal.
Sure, we’re all interested in the best deal, but to be considered for such, there are a few things you’re going to need.
First and foremost, you are going to need time. Especially when you’re going after the cheaper forms of money out there, lower rates relate to lower risk which takes more time to assess.
Second, you’re going to need a highly competitive financing scenario where several lenders would be eager to fund the deal.
Third, you will need to be able to meet all the requirements that “the best deal” out there is going to through at you before any funds are going to be advanced.
This type of perfect scenario where the borrower has a considerable amount of leverage is few and far between in the world of business finance.
The rest of the time, the lender has the upper hand and will dictate the process, requirements, costs, and so on, leaving very little bargaining power for the applicant.
Lenders tend to be in a stronger position because businesses typically are in a rush and don’t have the time necessary to carve out a position of strength in the financing process.
But despite their apparent disadvantage when negotiating business financing arrangements, business owners and managers will still push their luck to try and get the best deal without sufficient time or resources to pull it off. This can happen in that anything is possible…its just not likely most of the time.
This is where the bird in the hand comes in.
Because of the inflexibility and unpredictability of business lenders, when you have one of them interested and lined up to provide you with the capital require, you have to seriously look at accepting their offer, even if you believe there may be a slightly better deal out there.
While a better deal may exist, are you going to find it and wrestle it to the ground in time to take advantage of it? And how long are you going to have to delay making money while the search for the better deal marches on?
And if you can’t find a better deal and return to the original offer, there is no guarantee it will still be on the table.
Lining up business capital is almost always a challenge and getting optimal rates and terms even more so.
Once you have something lined up that can meet you needs and is acceptable to you, even if not preferred or ideal, you are likely better off in many cases to take the money and get making money versus the risk of going back into the market looking for a better deal.
Over time, this approach allows the business to take advantage of opportunities on a timely basis.
If the optimal financing approach is taken, there will likely be as many miss steps as successes over time, which is not likely to get you any further ahead, but will be much more frustrating to deal with when things aren’t coming together they way you expect or require.
We have now gotten to the end of February in 2012 and heading into the last month of quarter one of 2012, so I thought it was a good time to give my two cents on what I’m seeing in the business financing market place.
As a whole, there are certainly more businesses actively looking for money that at the same time last year. At least part of that here in Canada can be attributed to the above average weather, bringing spring and spring optimism out into the open sooner than usual.
And while lenders are getting more active in the market with their promotions and overall marketing activities, there is still more demand and supply for what I would characterize as reasonable risk business deals.
We are also continuing to see the development of a wide variety of sub prime and debt/equity financing models to try and fill the needs of the market place, much of which was vacated by those that failed to survive post 2008 recession.
Global financial markets are still pretty shaky, which has a major trickle down effect to all regional markets, including Canada, where the economy for the most part is still performing fairly well compared to most other parts of the world.
Most significant sources of debt financing will at the very least be drawing some of their capital from global markets, so as the world economy goes, so does the appetites, at least to some degree, of individual country lenders.
The main constant since 2008 is that you need to have your ducks in a row when applying for financing as loose or less than complete financing scenarios will continue to have a hard time attracting capital.
And even if you have a stellar, well rounded out project or internal need to present for financing, it may still take considerable time to get the deal completed and funded. This is especially true with the major banks and front line institutional lenders.
The secondary market also has the luxury of being more selective as they have more deals than they can handle due to the tightening up of lending/funding criteria at the branded banks.
All lenders are still very concerned about their portfolios as not all of the aftermath from the most recent recession has been seen yet.
In general, there appears to be an increase in both demand and supply of business financing and that trend is expected to continue through the spring and summer periods.
Key message though is that if you are going to need business financing in 2012, you need to start the process sooner than later, and you should consider getting some help from an experienced financing consultant to help you navigate your way through a continually changing market place.
The primary sources of business financing that are well branded via the banks are traditional forms of lending that provide lower risk rate for low risk deals, and only finance low risk deals. Any by definition provided by banks, low risk relates to a business balance sheet with a debt to equity level before and after new business financing is issued of 2:1 and a debt serving ratio of at least 1.20 (available cash flow must be 1.2 times the projected debt service).
But what if you’re business does not fall into these parameters? Are you out of luck, or do you keep knocking on similar doors to see if anyone will change their rules?
The reality is that conventional bank financing only provides about 1/3 of the required business financing that makes the economy go round.
The rest of the capital required comes from a number of different lending categories including the following three that I will briefly touch on.
Asset based lending as the name suggests focuses on leveraging the equity in assets that the business owns. There are many different slices to this market and a wide range of financing costs, call lending back to the amount of overall leverage the business is carrying and the inherent risk of loss to the lender.
For situations where there is a strong enough cash flow to cover off higher levels of leverage, there are investment banking and venture capital solutions.
Investment banking is another example of a business financing source that has many different variations, but for the most part this type of financing is placing other peoples money and providing a return on capital between 10% and 20% for the most part. This is accomplished by charging an interest rate on capital advanced as well as taking an equity stake in the business. Financing can be at or close to 100% of the capital required, depending on the deal. Approvals tend to be granted towards deals in specific industries and with well established and proven applicants or business teams.
Venture capital is a very common term in the business financing world, but tends to relate to a small percentage of cases where capital is required.
This largely due to the fact that venture capital is typically looking for a 30%+ return and are prepared to invest in growth industries that can be high risk but are also high potential for big returns. Because of the risk element associated with these types of deals, the majority of investments tend to fail, with the overall weighted return on capital being provided by a small percentage of deals that achieved their market potential.
There are many more examples of business financing sources out in the market place that may or may not be relevant to any particular situation.
The point here is that understanding where to look for money and what is relevant to your business requirements is going to be very important to locating and securing the capital you’re looking for.
And while even a blind squirrel can trip over an acorn every once in awhile, looking for capital strictly by trial and error is likely not going to be very successful, or can result in you paying far more for the capital you secure that you need to.
2011 has been an interesting year as the business financing market place continues to redefine itself since the beginning of the 2008 recession.
It was clear this year that business financing in general was starting to become more available and from more sources, but it also became clear that things were no where near where they were prior to 2008.
In fact, there have been so many changes in the dynamics of global finance, that it seems unlikely that things are going to return to what we got conditioned to with respect to business financing practices for the better part of two decades.
So my first prediction is that the world of business financing is going to continue to evolve in different directions that are going to be more in keeping with lender and investor risk management and in greater search for value.
One of the things I really noticed in 2011 is that there is a lot of money out there looking for a home, especially in the form of business financing in established and relatively secure economies. With all the global economic chaos of the past year, you may justifiably think that there are no sure bets anywhere in the world these days as the global financial network is highly intertwined across borders.
That being said, money is attracted to the best bets and the greatest opportunity to attract value.
And because of the recent recession, there has never been a better time to acquire assets at greatly discounted prices which is of great interest to those that hold and control the money supply.
My second prediction is that there is going to be lots of money available for the true value creators in the economy.
What this also says on the flip side is that speculative money is going to remain hard to find as lenders and investors are still trying to recover or still dig themselves out of the down turns in their portfolios.
The smarter money is on the smarter bets and for those individuals who can create the “add money and stir” type scenarios where all the elements of profitability and risk management are well thought out are going to likely have a sorts of financing options available to them.
Predication number three is that there are going to be more and more alternative forms of financing with unique risk management models out in the market place as sources of money continue to work towards filling the large gap that remains in what I will describe as the business sub prime lending market.
This is good and bad news in that many of these alternative sources can be quite anonymous and perhaps invisible in terms of their profile and working model as compared to the highly branded commercial financing entities that remain largely removed from higher risk opportunities.
The challenge here is while there are legitimate alternative sources out there, there is a lot of fraud and fee collecting entities as well who make more money collecting fees as they do on fund actually lent or invested.
Which leads into predication number four…more and more enders and investors are going to be charging up front due diligence fees to review financing and investing opportunities.
In the past, up front due diligence fees was something you would come across occasionally, but now we are seeing this more and more.
And what it amounts to is that business owners are going to have to pay for the time of money lenders and investors to review their requests and take their chances as to whether or not they actually get funding.
The process of business financing is becoming more and more of a hit and miss process as lender and investor criteria remains constantly influx, reducing any accurate predictability of what any one source of money may be able to do for you at any given point in time.
So in order to kiss some frogs, its going to cost money, especially for anything that does not fall under the lending/funding requirements of the “A” institutional lenders who may not charge an upfront due diligence fee, but many times still charge a commitment fee, which can basically work out to the same thing…it just happens later in the process when your hopes have been raised.
My final prediction is that business owners are going to be slow to react to the new world order of business financing and as a result there is going to be more upheaval in the economy as capital will fail to be in place when its supposed to be causing transactions to fail and businesses to collapse as business owners and managers hold on to old lending and investing axioms that no longer apply.
This creates tremendous opportunity for those that understand the change in the business financing markets and are either taking the time to educate themselves towards more effective business financing strategies going forward, and/or are prepared to invest in the experience of those that can help them navigate the landscape more effeciently.
The reality is that in the business financing world, not much is going to happen after December 15th in any given year and the progress on applications and funding requirements in the two weeks prior will not likely be moving at any great rate of speed either.
And once we hit the middle of December, everything basically comes to a stop until the second week of January.
So if you you’re just starting a search for business financing, or you’re in the middle of an application to one or more lenders, then be prepared for things to slowly grind to a halt in the days ahead.
While the same can be said for other industries as well, this is especially true in the field of business financing due to the number of individuals that can be involved with any one particular file.
And the more complex the financing requirements, the less likely anything will get completed from the middle of December through to the middle of January.
It only takes one key person in a deal to be away to prematurely grind things to a stop as well. That can be an accountant, lawyer, insurance broker, appraiser, environmental consultant, dealer, underwriter, and so on.
So even though the actual lender you’re dealing with may be open for business and ready willing and able to move the file forward, there can be outside elements that are required to be completed that will hold everything up until the new year when everyone is back in action.
The key message here is that December business financing activities can be very much like beating your head against the wall and the holiday time is more likely better spent on other things.
If this year marks your first experience with this sort of occurrence with your business financing activities, then please make a mental note of it for future years so that next time you will consciously get things started sooner, or at least allow for the down time and not try to push a rope up hill during the holiday season.
If you’re trying to get a deal funded and are near the end of the process, a full court press may get things done, but don’t count on it.
Being at the mercy of others is never any fun, but working to hard against what is inevitable is likely going to be even worse.
The year end time period is a good time for financial performance reflection and planning for the coming year. Much of anything else in the area of business financing is not likely to be fruitful.
One thing that many entrepreneurs are not not keen on is paper work and bean counter type activities that may drive them to the Aspirin or Tylenol bottle for headache pain relief.
But regardless of what a business owner or manager likes or believes is a good enough representation of their business, debt financing sources and equity investors have other ideas.
To this point, whether you are looking for business financing today or not, there is a certain degree of readiness that should always be in place so that there are no delays in applying for financing and there is no lost opportunities from a lack of basic information being available or presented to a source of capital.
For instance, one of the most basic requirements any lender or investor will ask for is the last two or three years of third party accountant prepared financial statements for the business.
If this is not always available and up to date, it should be as it will be very difficult to be considered without historical financials.
And if the amount being requested is over a couple of hundred thousand dollars, then the type of accountant opinion is also going to be important.
For small financing amounts, a notice to reader accountant statement can be sufficient to most lenders, but as the amount of financing requested and overall financing outstanding and the overall level of business complexity growths, the more importance will be placed on the accountants opinion through either a review engagement or audit.
These additional levels of verification cost more money, but these can also be the difference between getting serious consideration from the type of lender or investor you want to work with and missing out on a good business financing opportunity.
The same can be said for management accounting reports that show product margins, variance reports, and operating break even. Projections and forecasts of both cash flow and income are also going to be important to complete the picture of where the business is headed.
Having good records of company assets and reports of good standing with with respect to any government regulations can also be helpful.
These are some of the basics that relate to virtually every business and the more these items are kept up to date, the faster the business will be able to react to capital requirements.
Scrambling to get many of these items up to date can not only cause delays, but lead to mistakes and a poor representation of the business and your business management.
Having the basic core financial information for past, present, and future at the ready provides confidence to lenders and investors and can immediately separate you from other accounts they are considering.