With all the changes that have taken place in the capital markets over the last 18 months, there is now a need to change the way that requests for capital are positioned with lenders and investors.
In the recent past, applications were primarily based on historical financial statements and a decent attempt at cash flow projections to support the request for additional or new business capital coming into the business.
But things have changed whereby there is a much greater demand by lenders and investors for the business owner and manager to put forth commercial financing requests that are more thoroughly supported by source documentation and spend more time on risk management than forward thinking marketing strategies.
From a lender point of view, we have moved into a commercial lending era of loan security, lender mitigation, and business risk management. While there still is money available in the market for businesses to acquire, there is a great deal more work involved in convincing someone that you’ve thought through all the major risks that could impact the business going forward and have a plan to mitigate the risks either in a proactive or reactive sense.
In the past, a lot of the details which have always been important to a business financing deal were glossed over by lenders or investors due to the strength of the economy and the unlikelihood of many types of risk to be of an issue or concern to many business owners. This saved on the due diligence process and was supported by decades of portfolio analysis that identified what areas of risk a lender or investor needed to focus on the most.
With the impact of the current deep running recession, most of that logic is thrown out the window as its a little more of an every man for himself type of world where the business owner now has to actually think about all the things that could go wrong in advance of asking for money.
In my opinion, it the financing world had taken more of this type of security and risk first approach years ago, the current recession would not have run so deep. But in better economic times, everyone wants to get in on the lucrative capital financing markets so lenders develop more aggressive portfolios to get their share of the growing pie.
But things are different now. Lenders and investors have made the necessary adjustments, which are akin to their survival as viable business organizations.
Unfortunately, for the most part, business owners have not adjusted the way they manage their business from a financial risk point of view and as a result their business financing positioning when asking for new capital can be way off the mark.
Its really a return to good solid business fundamentals that we are seeing in the market. Over the long run, this should be a good thing. In the short run, it looks more like pain and confusion to those trying to locate and secure business capital.