Here Are My Top 10 Reasons Why The Business Financing Process Can Be Hard

The Number 1 reason business financing is hard is due to Business Owners and Manager predominantly drawing of personal financing experiences.  

When you're a business owner or manager or advisor … somebody working in a business who's tasked with getting capital for the business for whatever purpose, you start from a knowledge base that sort of relates to your consumer financing experience.

For many of us, we've all been through situations as adults where we've got a credit card, a line of credit, a car loan, a car lease, a mortgage, and so on. And all those application processes are, for the most part, very straightforward. And the qualifying rules known. They're not always easy, but they're fairly mechanical.

For example, for personal financing, there's a credit score that's provided by credit reporting agencies and there’s income that you get a T4 slip and you file a tax return for.  The things that are used in making the decision making process are pretty straightforward.

So when people are in business and they're looking at getting a business loan they make the bad assumption that it's going to be similar…that it's basically the same kind of a process…very straightforward, very clear, simple, and won't take that long to complete. And so that's, their starting point.

The Number 2 reason business financing can be hard is because all businesses are somewhat unique.  

Every business kind of has their own DNA, has their own backstory, origin story, operating components, and so on. Every business has its own dynamics, personalities and abilities of the owners, of key employees, of suppliers, the product or service the business provides, how long they've been in business, etc.

So there, there's a lot of unique aspects to it. When a financial institution is assessing a business financing application for business loan of some sort, they have to figure out what your business is all about. An underwriter will look at the business profile and say, okay, I understand it. And based on all that, I'm comfortable with granting you credit or granting you an approval to the capital you require.

But it's not always a very straightforward process. It can become quite complicated at times and cumbersome. 

The Number 3 reason business financing can be hard is that when you make an application, it doesn't matter what financial institution or lending institution, specialty lender, whoever you apply to,  there's going to be a person called an underwriter that's going to intake all your information, and they're going to make a credit decision, or a group of them are going to make a credit decision.

And so you're always at the mercy of the underwriter.  What type of underwriter are you going to get? Is this person got 20 years of experience or 20 days? Do they have a financing background? Have they worked in your industry? And so there's a lot of variability and you don't know the level of experience and competence you're going to get.

I’ll give you an example.  A few years ago I was talking to  salesperson at one of the major banks in Canada. We were talking about a particular deal that I was representing a client for trying to get some financing arranged for them.  And he said, you know what, this deal will work with our bank,

but it's going to depend on the underwriter. And I said, what do you mean? And he said, well, in our underwriting shop, there's four underwriters that randomly get assigned deals to assess and review. If  person A gets the deal, they'll likely approve it. If person C gets it, there's not a chance it'll get approved. So you get into these types of dynamics that you would never assume even exist. 

The 4^th reason business financing can be hard is because the business financing market can be extremely fragmented at times.

It can be very difficult to know where your request fits at the point in time when you want to make an application. And that can end up causing the overall process to take more time than you wanted. It can also end up with a higher cost financing. It can end up with terms and conditions that you don't care for or don't prefer.  But if you’ve run out of time, the options you’ve uncovered may be the ones you have to consider taking or lose out on an opportunity or worse.

It can be hard at times to know where to apply for financing. Sometimes it may be obvious, sometimes it's not. And that also contributes to the complexity of the overall process. 

The Number five reason why business financing can be hard is lender risk assessment.  

Every financial institution that grants business loans believe that they're lending you money based on the fact that they've figured out the risk associated with the loan, because there's always risk and the lender mitigates it through the terms and conditions of the financing.  The reality is that risk can be hard to quantify and. As a result, there's a lot of business financing applications that get declined because  underwriters and lenders collectively have a hard time property qualifying the risk.

And so if, if they can't feel comfortable and they don't think they've mitigated the risk properly, then they're going to say no and decline your request. And then you're off trying to find somebody else to help you out.  Out of all the things that make business financing frustrating and confusing, this might actually be the, the number one reason.

The Number six reason why business financing can be hard is what I call it the Intentional Disconnection Among Origination, Underwriting, and Funding.

So let me explain a little bit. The sales function for a financial institution is responsible for finding lending opportunities, to find companies that are looking for financing, collect their application and support information and bring it into their organization in order determine if the financial institution can provide the financing that's being requested.

That function is called origination. From the origination side, it goes to underwriting. And the underwriter is responsible for reviewing all the information and making a credit decision in your favour or, or not in your favour. So basically approving or declining your application. And then the third phase is the funding side, where  once your application has been approved, it goes into a funding process where all the terms and conditions of the approval have to be met.

Now, in days gone by, there was not a lot of separation between these three stages origination, underwriting and funding could kind of all flow together and the process could move pretty quickly.

But then things began to change. I don't know exactly how long ago, probably it might even be 20 years ago now, when a business owner could go into their bank, talk to their bank manager, make a loan request to the bank manager, and the bank manager might be somebody the business owner had known for 10 years.

And the bank manager had the ability to approve the financing and basically fast track the funding. 

But then senior management of the bank took that ability away from bank managers because they found that when there were situations of loss, when they did the postmortem on those cases, that there'd be a lot of bias involved in the approval and funding process. So they took those decision making abilities away from bank managers.

Senior management created a separation of duties between origination and underwriting. 

When a deal got sent to underwriting, the underwriters would approve the deals and then the deals would go into funding and most deals could fund fairly quickly.  But once again, there was no real separation of duties. So the requirements of the bank weren't always met to the standard of the bank during the funding process.

Once again, when the bank completed postmortems on files that they lost money on, they could see that a lot of times the funding process did not meet all the approval requirements. So senior managers created separation of duties between underwriting and funding.

As a result, there are these three stages that you have to go through when you apply for business financing. They're independent of each other, and you have to manage each independently, because if you don't, you can't assume that if you've gone through stage, you're going to be successful and make it through the next stage.

If you get an approval in second stage, there's no guarantee you're going to be funded in third stage. So it makes the process a lot more complex. And most business owners and managers don't understand this until they're in the middle of an application and they're living it in real time.  This is probably the one thing that I pull my hair out the most over when I’m involved in an application for business financing.

The Number 7 reason why business financing can be hard is due to all the third party entities, individuals, and personalities involved.

In many business financing applications there can be lots of third parties that have to contribute to the process.  I'll give you an example. It's going to vary from business financing request to request and  it's not going to be the same for a smaller request or simpler request versus more complicated request, but you can have accountants, lawyers, appraisers, environmental consultants, insurance brokers, mortgage agents, suppliers, transportation companies, installers, and all sorts of other entities and individuals that may need to be involved in the process.

And each one of these entities have individuals that are supposed to do the tasks that get assigned to that entity. Those individuals can be on holidays, they could be having a bad day, they can be underqualified.

There's all these dynamics that you to have to manage as the person applying for the financing. Because at the end of the day, it's you that needs the result, not anybody else. And if the deal is being held up somewhere, you need to track down the problem, fix it, and manage the result as best you can to, to completion.

The Number 8 reason that business financing can be hard is Point in Time Dynamics.

If you just leave everybody to their own devices, it's hard to know if sometimes it will ever complete. And it is certainly a complicating element of the whole process.  So, if you watch some of my other videos, you'll likely hear me refer to financing as a point in time event, where a business is trying to secure a certain amount of capital for terms and conditions that are acceptable to it at a certain point in time.

And the working assumption for most businesses is that regardless of when an application for financing is made, that the rules applied by the lender to decide whether they will grant you financing or not, the amount of time it's going to take, and the general process that will be followed will be the same each and every times.  Unfortunately, this is not always going to be the case.

Financing companies are businesses just like any other business, and they adjust how they do things based on how things are going during a particular year, a particular quarter, a particular month, and they adjust how they apply their financing criteria accordingly. I've seen situations where a business will apply for financing at a certain point in time in the year and get approved and funded.  Then six months later, a very similar business made a very similar request to the same lender, and they were declined. So when you make a business financing application, it can be very hard to figure out what's going on in the background from the lender's perspective. 

The Number 9 reason that business financing can be hard is due to the Available Financial Reports, Both Internally and Externally Prepared.

Financial information that's available can be a big challenge for an equipment financing application.

When you apply for financing, it could be anywhere in the calendar year or in the business cycle. And so, at that point in time, what kind of information do you have to support your case? In certain stages of the year, your information is fresher and more relevant than it is in others. And also, what you invest in the creation of the information reports can also make the information more reliable and more valuable.

So let me give you an example.  All companies have to file income tax returns every year.  Their third party accountant prepares financial statements and sends them into CRA. There are three significant aspects of third party prepared financial statements that can impact the business financing process.

The first one is when the financial statements get prepared. So let's say you have a December 31st year end. You get six months to file the statements according to Canada Revenue Agency. So let's say you take all six months and the financial statements are available at the end of June. Say you apply for financing in August.

Well, the financial information as of December 31st, the previous year, is already eight months old. So that's one complicating factor. The second factor to be taken into consideration is the type of review. An accountant will prepare the information for business under one of three reviews.

Compilation, Review, Engagement, or Audit. Compilation has the least reliance associated with it and Audit has the most. Compilation is the lowest cost and typically is the fastest to prepare. And Review, Engagement, and Audit are more expensive and take longer to prepare.

 But depending on what you're getting the accountant to do can impact the way the underwriter looks at the information and considers the results that you've generated in the business. The third factor is who actually does the financial statements. Is it a one person accounting firm, or a mid tier accounting firm, or a larger accounting firm.  The size of the accounting firm can also impact the way the underwriters look at the tabulated results.

The larger the firm, the more likely that the accountant’s opinion, from the underwriter’s perspective, is accurate, unbiased,  at arm's length and objective. With a  smaller accounting firm, the concern is that there could be influence and that a smaller firm could have too close a personal relationship with the business owner or manager and that there's not enough people involved to create separation of duties in the accounting firm to keep the information completely unbiased and independent.

With respect to available information, whatever gap there is between the business year end and the time when financial statements are available,  lenders will ask for interim financial statements, which come from your bookkeeping system, prepared by internal employees or by third party bookkeeper.

Once again, the quality of that information is not as reliable as if it's done by a third party accountant. And when it comes from the business bookkeeping system, the amount of detail that's provided, and the amount of detailed reports that can be generated, can have a significant bearing on the way that an underwriter will look at the information.

So once again, all of this can become a complicating factor to the business financing process in terms of the types of information that you can provide and when you can provide it. 

The Number 10 reason business financing is hard, is due to Lender Organizational Complexity.

I'm going to end my top 10 talking about lender organizational complexity.  The bigger the company, the more people involved, the more people that have to touch your file, the more people that have to do something in the assessment and funding processes, the more likely it's going to take longer, it could be misunderstood, it could be misrepresented, and you won't get the results you want.

That doesn't mean you shouldn't work with big companies, I'm just saying it's something you need to factor in. Smaller companies with less people touching your application and working on the assessment and funding processes typically can complete things faster. That doesn't mean it's going to give you the best result, or provide you the terms and conditions you want.

But it is a factor in the process that you need to consider. 

Okay, so the business financing process is hard.

That's what I'm saying. But at the same time, I want to clarify, it's not always hard. 70 to 75 percent of the time, applications get processed and get completed in a reasonably short time, with reasonable levels of complication.

Not without any complications, but it certainly can be reasonable. But 25 to 30 percent of the time, it is hard. And it is something that you have to manage if you want to get the result you’re looking for.

So to this point, I'll give you five key takeaways.  The first one, and probably the most important is, is to start early. Many times businesses are working through initiatives where they know they're going to need capital and they may work on an initiative for years as the business progresses through planning, engineered drawings, doing all kinds of product testing, working through all sorts of things, trying to get everything lined up so that they can move ahead with a particular project or initiative requiring capital.

The business could be building a building, expanding a product line,  buying equipment, or many any other things where capital need is needed.  The business goes through all this process and they make the bad assumption that when we get all this stuff ready to go, we'll work on the financing right at the end and we'll just dovetail it in with everything else and then we'll just keep going and we'll meet our deadlines.

The first takeaway is start early.

In a lot of cases, the business finance process is slower than what people think it's going to be. So it's important to start it early. And make sure the financing application is being done in a parallel path to everything else that is being worked on that will require the capital being requested.  So that way if there's any adjustments that need to be made in the financing application, and/or the business operational planning process, you can make them without wasting any time.

The second takeaway is be prepared for it to be hard because if it is hard, you're ready.

You're on top of it. You know, you've started early. You're focused on the details, so you're not going to be surprised. And you’re confident you're going to be able to manage things to the outcome that you want.

The third takeaway is that the paranoid survive.

In a very sarcastic way, I'm saying I don't trust anybody to do anything in this process. That doesn't mean people are incompetent or lazy or malicious or anything like that.It just means that sometimes there are so many things going on and so many parties involved that if you assume people are going to get things done when you want them done, you're going to be disappointed a lot of the time. And sometimes the smallest things can hang up the whole process. So if you're on top of things and you're making sure that things are getting done in a timely fashion or you're following up or filling information gaps and not letting time lag, you're going to be better off.

The fourth takeaway, always remember it's certainly not over until it's over.

It's like I talked about earlier. Once you get in through the origination process, then you get into the underwriting process, and then you go into the funding process. And each stage that you go through doesn't guarantee that the next stage is going to complete.

You have to stay on top of the details until money is advanced, and until you get what you're looking for, it's not over, and you've got to pay attention. 

And for the fifth takeaway, get help if you need it.

If the process bogs down,  or you get declined and you don't know where to go next, or you're having problems with your origination package, or you can't get the deal funded, or some other reason complicates the process, reach out and get assistance to help you through the process.

So there you have it, there's my top 10 reasons why the business financing process can be hard for small and medium sized businesses. If you have a financing problem, challenge, or requirement that you'd like to talk about, feel free to give me a call or send me a note. In the meantime, I wish you all the luck with your business financing endeavors.

Take care.

Click Here To Get In Touch With Business Financing Specialist Brent Finlay

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"Having Success With Business Financing Can Have A Lot To Do With Your Commitment To The Process"

When a business owner or manager is trying to secure business financing for their enterprise or operation, they inevitably will have to follow a process to get the capital their after.

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.

Click Here To Speak With Business Financing Specialist Brent Finlay For A Free Assessment Of Your Business Financing Options

“Business Financing Or Commercial Financing Aligns
With A Bird In The Hand Philosophy”

One thing that business owners and managers have a hard time understanding is that business financing or commercial financing is not typically 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 lower cost funds out there, remember that lower rates relate to lower risk which takes more time to assess, approve, and fund.

Second, you’re going to need a highly competitive financing scenario where several lenders would be eager to fund the deal so that you have leverage to command lower rates.

Third, you will need to be able to meet all the requirements that “the best deal” out there is going to throw 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 as 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 required, 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.

Click Here To Speak With Business Finance Specialist Brent Finlay For All Your Business Financing Requirements

At Least Half The Battle With Business Financing Is Focusing In On The Most Relevant Sources”

When it comes to business financing requirements, most business owners and managers do not have anywhere close to a full understanding of what’s available in the market.

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. And by definition, financing provided by banks 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 around.

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, all 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.

Click Here To Speak With Business Financing Specialist Brent Finlay For A Free Assessment Of Your Business Financing Options

“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