“Here Are Some Tips For Being Ready For
Business Financing Applications”
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 for financing 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 tax accounts and 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, which can immediately separate you from other applicants they are considering.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay For All Your Business Financing Needs
“What Is The Benefit To Outsourcing Your Business Financing Activities”?
As a business finance specialist, I am regularly engaged in the conversation of why a business owner should want or need to pay for my services.
Its a good question for sure.
And on the surface at least, it would appear that there are enough business financing options out there that any business owner should be able to walk through the door of their local bank or institutional lender and get all the business financing they require. Right?
Unfortunately, perception and reality are a bit different in the world of business finance.
The process of securing business financing is typically harder and longer than most people think it will be.
There are many reasons for this of which I will only touch on a few.
First of all, most business loans or financing facilities are customized financing in that no two businesses are exactly the same in terms of what they do, the stage of business development they are in, size, scale, etc. So there is work going into assessing each and every business case compared to something like an application for a residential mortgage.
Second, lenders are always trying to balance their portfolios, so effectively what they can lend on at any given time is a moving target making it easy to waste a considerable amount of time focusing on the wrong source of capital at any given time.
The end result is that the overall process for locating and securing proper financing can be very difficult to figure out and when you do get a bearing on the way things work, everything could change before you’re going to need to draw on that information again in the future.
I was reading an article in the Globe And Mail about the small business owner’s reluctance to outsource. You can check it out by following this link … http://www.theglobeandmail.com/report-on-business/small-business/grow/expanding-the-business/small-business-owners-still-reluctant-to-outsource/article2060249/?utm_medium=Feeds%3A%20RSS%2FAtom&utm_source=Report%20On%20Business&utm_content=2060249
The article basically describes how business owners want to outsource, but are unsure of the value of doing so, and end up doing too many things themselves.
This is very true in the world of business financing as well.
With respect to source business capital, there are two basic costs that you have to consider as a business owner.
The first set of costs is your out of pocket costs, opportunity costs for your time, and lost opportunity cost for not getting the right type of financing when its required. In my experience, this can be many times the cost of third party assistance with the financing process.
The second set of costs revolves around not continually looking for better fit financing or contingency financing. Most business owners will only look for capital when its absolutely required and don’t take into account how the capital in place may be priced too high compared to available alternatives, or is not allowing for optimal growth. Once again, the true cost of not having a proper balance sheet in place can be incredibly expensive over time.
Utilizing the services of a business financing specialist is another outsourcing choice that needs to be weighed on the basis of the cost and projected benefit. This may or may not be required for every business situation, but it should likely be at least considered more often than not as the do it yourself approach can produce significant visible and hidden costs that can potentially be avoided.
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“Here Are The Three Debt Lender Requirements That Will Apply For Any Request For Business Financing”
I don’t want to over simply things as business financing applications can become fairly complex and involved, depending on the amount of funding a business owner is looking for and its application.
That being said, regardless of the level of complexity attached to not only getting an approval in place, but getting funds advanced, virtually all lenders are going to focus on these three main areas:
- Debt Servicing
- Loan Security
- Borrower Guarantees
Each category of lender is going to put different weights on each of these areas as well, but as one institutional lender who provides low cost financing put it to me the other day, “in the first 10 questions we ask, 9 are about debt service”.
So it goes without saying that if you’re in search of low cost financing, the proof and support for debt service are going to be the most important element being reviewed.
As the cost of financing goes up due to perceived higher risk, which is usually associated with less predictable or supportable debt service, the shift in attention moves to the other two areas as there is a greater possibility of a loan default which would require the lender to realize on securities and guarantees.
This is not to say that debt service is not going to be very important to the asset based lenders of the word. It just means that at least half of their top ten questions are going to be directed to security and guarantees pledged.
And when I speak of guarantees, this does not automatically include personal guarantees. If a business has accumulated enough retained earnings over time and non pledge asset value to provide the comfort the lender is looking for, then a business guarantee may be all that’s required. In situations where there are multiple business entities within a business group for tax purposes, its not unusual to see corporate guarantees from each entity to support a loan issued to one business in the group of companies.
These three areas are basically the 80/20 of business financing for most lenders. If the 500 page business plan or elaborate financial projections don’t adequately cover off these three areas in accordance to the lender category and risk category they are trying to get funding from, then the loan application is likely going to be a non starter.
Click Here To Speak Directly To Business Financing Specialist Brent Finlay About Lender Requirements And How To Satisfy Them.
“Getting and Keeping Your Lenders and Investors Comfortable With Your Business Has a Lot To Do With Risk Management”
In the lending and investing world, the people providing the funds are always looking at how risk can be removed, reduced, or off loaded.
Most business financing requests, at least on the surface, propose a viable strategy that requires capital when applying for a business loan or approaching an investor. What separates 90% of all applications (or more) is the failure of the applicant to identify risk and find a way to remove, minimize, or neutralize it from the business.
In the standard “field of dreams” application where you give me the money, everyone will come from all over to buy stuff from me, and nothing will go wrong along the way, only tends to work in the movies.
But in the real world, all deals have risks and the better you are at proactively identifying them and doing something to mitigate their occurrence or impact, the more likely you are of always being able to secure the capital you require.
The larger, more established the business, the less intensive risk management overall needs to be as financial strength and equity in the business will provide the means to deal with things that can and do go wrong in most cases.
But when you’re smaller, or in a start up or growth mode, there can be many more things that can work against you that individually or collectively can put you out of business.
So lets get into more concrete examples to further make the point.
Anything that is new(er) and less established has more risk. The most obvious first area of concern is Sales. The sales orders, defined letters of intent, contracts, etc., that you can procure or show are available to you when seeking money, the more attention you’re going to receive.
The same holds true for collecting the money once the sale is made. If terms are required, is there a solid credit granting policy in place, does the business have any experience in collecting money, can the accounts receivable be insured or financed directly?
On the supplier side, is there well defined purchasing agreement for price and quantity? Can the price be hedged in some fashion? Is there more than one source of supply lined up? What is the stability of the local suppliers and do you need to go further a field for better pricing and more certainty of supply?
These are all risks. Established businesses get established because they have been able to figure out how to deal with all the relevant risks to them as they developed their business over time. In many cases they were lucky that lurking risks did not impact them and as they went along, systems and processes and expertise were either developed or put into place to make sure key risk areas were kept under control.
For developing businesses who haven’t got everything figured out, the standard position is to push forward and figure things out as they go. If that truly is the approach, then you’re going to need to have a fantastic opportunity in tow to offset risk, or enough of your own money to make things go as its highly unlikely that people with money are going to part with any for business proposals that are just as likely to lose it as pay the money back.
Click Here To Speak To Business Financing Specialist Brent Finlay
