Reducing Lender Risk Increases Business Lending

“What Can You Do To Reduce Risk In Your Business Financing Application To Get A Lender To Say Yes”

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.

Click Here To Speak With Business Financing Specialist Brent Finlay

Before Applying For Business Financing, Make Sure You Know Your Stuff

There’s Nothing More Impressive Than First Hand Knowledge

Have you ever had a conversation with someone where they just knew everything relevant about a subject?  What ever question you through at them, they instantly came up with a factual, accurate, no fluff answer that left you impressed?

That type of focused and detailed knowledge can also be the making of a great first impression if used properly.

Too often when business owners or managers apply for business financing, they are not completely up to date on the details and specifics of their own business.  Yes, they can answer questions at a strategic level, but when lenders or investors start to drill down into the specifics,  they don’t have much to offer or have to overly rely on reports and notes or even their  employees to answer the questions posed.

Outside of the underlying business opportunity, there is nothing that impresses a lender or investor more than a business person who they can grill in all directions but can still consistently come up with a solid and specific answer.

Why?

Because this type of demonstration of knowledge is hard to fake with some last minute cramming.  It tends to speak to someone who is on top of the key metrics of their business, pays close and regular attention to the things that matter, and has thought about things enough to have a strong opinion if required to provide it.

The key though is in the delivery.  Being a “know it all” can totally destroy the potential good Karma created.  No, the better approach is to let them come to you.  Let them ask the questions and expand further on your answers.  All you have to do is provide the answers and let the interview flow.

I mean, if you had some extra capital and wanted to lend it out or invest, who would you be more willing to trust with your money… a business person with general knowledge or someone who gives you all kinds of warm fuzzies when they blow you away with their depth of knowledge and attention to detail when describing something to you.

It’s not a hard answer for me.

Too often potential business financing opportunities go up in smoke when the business owner or manager either lays an egg or basically does not impress when they get their opportunity to close or advance the deal.

There Are 4 Reasons To Secure Capital For Your Business

Can You List The Four Reasons Why Someone Would Need To Secure Capital?

There are 4 and only 4 reasons to secure capital for a business.  Each reason or purpose for business financing will impact the type of lender or investor to approach as well as the manner in which you approach them.

The 4 reasons for seeking more capital for a business are as follows:

Start Up.  At the commencement of a business entity or operation, funds may be required for working capital, fixed assets, intangible assets, leaseholds, inventory, and so on.

Growth.  An existing business looking to expand may require capital to increase its capacity as well as the working capital required to fund a larger volume of activity.

Acquisition.   When one business acquires another, it must purchase either the shares or the assets of the target business with a combination of cash and external capital from debt or equity sources.

Debt Consolidation and/or Re-organization.  In times of business downturn that create financial losses, capital must be injected into the company from debt or equity sources to cover the costs of operation and allow the company to continue.   Another scenario would be when the term structure of the debt outstanding does not match up against useful life of the assets securing it.  In these cases, a debt restructuring will take place to balance out the balance sheet. A third example would be when outstanding debt exceeds the leverage against equity allowed by the lender, requiring a debt reduction and/or an infusion of investor or shareholder equity.

Each of the reasons to secure capital or apply for business financing have their own lending and investing criteria.  A business manager or owner seeking incremental capital would be well advised to gain a greater understanding of what is required for each and work towards identifying lenders and/or investors that are relevant before proceeding too far with any inquires to secure business capital.

We will get into more of the specific for each of these uses of funds in future posts.

An Often Forgotten Source Of Business Acquisition Financing

Before Seeing Your Banker About Business Acquisition Financing, Perhaps You Should First Talk To the Vendor

More and more business acquisition financing is provided by the actual vendor or seller, not just your banker. And in many cases, bankers will not even entertain providing acquisition financing unless the vendor is contributing some amount of financing as well.

This is especially true with purchasing a small business where a good portion of the sale price is tied up in Goodwill. Most lenders will not finance 100% of the goodwill. Actually, most lenders won’t finance any goodwill without some amount of additional security, guarantee, or surety from the buyer.

The lenders logic is that if the vendor is so certain that the value for goodwill in the purchase price is valid, then they should have no problem providing the financing by basically deferring the portion of the proceeds earmarked to goodwill until an agreed upon time in the future.

There are a couple of other reasons why vendor financing is more common for acquisition financing than you may think.

First, any purchase and sale agreement I’ve ever seen always has some form of recourse present to protect the buyer against mispresentations of the seller and vise versa. By having the vendor provide some amount of financing towards the purchase, there is effectively a recourse fund in place which further protects both the buyer and any potential lender that also gets involved.

Second, by having an active stake in the business being sold in the form of a vendor loan , the vendor is highly motivated to provide a seamless transition to the new buyer as well as ongoing support if required.

Many times, the vendor will take the money and run after the completion of sale and payment of all the proceeds, leaving the buyer to deal with any unknowns or transitional problems that might arise. And depending on whose statistics you subscribe to, one of the top reasons for the failure of acquired businesses is due to poor ownership and management transition.

Vendors tend to not want to provide financing if they don’t have to, which only makes sense. However, failure to be open to vendor financing can also leave businesses unsold for several years as potential buyers are not able to secure enough lender financing without the vendor being involved.