In order to acquire any amount of business financing, the lender, investor, or funding source needs to be able to be comfortable with the risk of loss versus opportunity for profitable return. Clearly the latter must out weigh the former, or no business loan or other form of capital is coming your way any time soon.
Especially these days as we continue to crawl out of the recession, lenders are much less likely to take on any level of risk than they were two or three years ago. Which has created a considerable problem with business owners in that they don’t generally know that the bar has been raised on lending applications and if they want to secure financing of any sort, they are going to have to not only show a debt lender or investor that the risk of loss is low, they are going to have to proactively put things into place to protect the source of capital from losing money.
In taking from some marketing vernacular I heard the other day, its all about “stacking the cool”. This refers to marketers giving you so many features and benefits, many times above and beyond the core product, that you become strongly motivated to make a buying decision in their favor.
Same goes with business financing folks.
If you’re looking to secure money, you’re wearing your marketing hat as much as your finance hat. And its not just about accurately telling a good story about why someone should give you money. Its also about how you are going to make sure they get paid back with their expected return, or how are you going to stack the cool?
Obviously my analogy is somewhat of a stretch for the stuffy world of finance, but bear with me.
I was recently working on a rather tough deal that provided enough lender risk that we weren’t getting any where with relevant financing sources. So we started to stack up ways to reduce the lender risk…Corporate guarantees, personal guarantees, higher down payment, vendor repurchasing agreement for a portion of the asset value, etc.
Of course all these things are trade offs and can provide greater risk to the borrower. But if you need the money and no one is prepared to give it to you at any price, then its time to start taking on more of the risk or finding other ways to generate the capital your business needs.
After weeks of coming up with different risk reduction strategies, a financing commitment was provided that otherwise was never going to happen in the current market in the time the borrower had to work with. In better times, the process may not have been so hard and the borrower may not have had to take on as much risk as they ended up taking. But then again it may have been very similar, even in better times.
Point is that you need to be prepared to off load lender risk by taking on more yourself or finding someone else to participate. As I mentioned above, sellers may be interested in helping reduce risk to sell their products. Insurance companies may have programs that can reduce certain types of risks the lender is uncomfortable with. The more you strengthen the deal, the better your odds of getting funded.
Now that would be cool.