There can be some considerable differences how lenders operate in one local market compared to another. Local markets can be driven by one specific industry or be more diverse in nature. They can neighbor larger centers that are again narrowly focused on a core group of industries or more broadly representative of the market at large.
All these types of factors will have an influence on both debt lenders and equity investors.
Competition in the business financing realm is typically driven by lots of good business that can be done in a small area of concentration. The more competition, the more opportunity to not only secure financing, but to negotiate better rates and terms. Where competition is limited or sparse, it can be very difficult to not only locate any type of business financing at times, but the cost is likely going to be higher and needs to be factored into the equation.
And just because you see a nationally or provincially or state operated lending organization with branches and reps all over the place, don’t think for a minute that they are going to be applying some sort of generic criteria set or general appetite in all the different local markets they serve. Larger lenders that cover broader geography will typically divide their business according to local business market dynamics and have different rules for lending, different portfolio requirements in different areas.
Same bank, but very different rules.
As a business owner where location will be important to a business financing request, it is important that you become aware of what the business financing dynamics are in your market area. The same can be said for a business starting up or one looking to expand into another locale. Knowing the financing, lending, and investing dynamics for the industry and region ahead of time can save you a lot of pain and anguish in the long run.
And remember that whatever you believe you understand of these local dynamics today, the sands of business finance are always shifting so its going to be important to pay attention to any changes that occur in the local money supply so you’re not caught scrambling to either replace the credit facilities you already have or acquire additional capital for incremental business growth.
Sometimes there are under serviced areas of a region or country for more reasons than just supply and demand. If there isn’t a scalable source of capital around, it can hamper the development of any otherwise viable business opportunity.
At the time of writing, we are closing in on the end of November, 2010.
In the world of business financing (which may be similar to a lot of other industries), everything is going to start to slowly grind to a halt over the next 3 weeks and by the middle of December nothing much is going to happen until the second week of January in the new year.
For businesses that have applications being worked on for a while already, this could be a good thing as lenders work to clean out their active files, especially those on a calendar year end. Files that have been dragging along for several months now may actually get some action as there is a last push to lower the pile of outstanding apps before the holiday season commences.
If you’re just starting the process of seeking additional business financing in the form of debt financing or equity investment, be prepared for anything you start now to drag over into the new year and take awhile to not only be seriously looked at, but completed and funded if you get that far with your target lender.
At the same time, there is going to be some opportunity to secure credit in the short term, especially with lenders that have not met their lending targets. This is the time of year where credit policies will either tighten up or loosen off a bit, depending on where a lender with a fiscal year end is with their budget and forecast. Like any other business, these folks work hard for their bonuses, and if there is a way to hit those numbers within their financing requirements, they are going to be a bit more motivated to pull something off now than at other times of the year.
The flip side is the debt financing entities that have made their targets already and are only considering new borrowing opportunities in the last quarter than will reduce the overall level of risk in their portfolios.
The challenge for the business owner is trying to figure out who is lending and who isn’t right now. Its a bit of a crap shoot to say the least without any real outward signs that you can pick up on from the street.
Even if a debt financing source or equity investor is willing to get something done before everything shuts down, there are all the other parties to the process (appraisers, lawyers, accountants, etc.) that may also be hard to get work out of at this time of year.
My advice would be to avoid the inevitable frustration and get ready for a fresh run at the market in early January. If you’ve got a cash crunch on your hands right now, see what you can do to delay the impact so that you’re not dependent on something getting done quickly.
Outside of the end of August, the Christmas and year end period tends to be the most difficult time to get any business financing in place, so try to avoid the process right now if at all possible.
When it comes to business financing, the whole process is an interesting study on promise, commitment, and follow through on both the side of the borrower and the lender.
When lenders are prepared to issue a commitment, they provide a piece of boiler plat, pounded out by their lawyers, that a borrower can’t possibly comply with in an absolute sense with more out clauses built in than most hollywood prenups. The lender words everything in their favor and basically provides you with a take it or leave it proposal on all the crafted wording. Even if they are open to make changes, do you have the 30 to 60 days to wait to deal with the back and forth process between their legal counsel, head office and your lawyer?
Probably not. So are lenders hypocrites, preaching loan defaults on one hand and then causing them to happen on the other? Sure they are.
But what about the other side of the equation?
Many business owners will say just about anything to get the capital they’re looking for, especially if their in a real pinch. The prospects of things not working out are not an option and if things do go sideways sometime in the future, the business owner will deal with the problem when required.
Yet, when things do go south, the first thing the borrower does is to try and think up every conceivable strategy to get out from paying back the debt or having to go bankrupt or needing to liquidate other assets to repay the lender that was promised to be repaid… in writing.
Basically, both sides both talk out of both sides of their mouth.
Which is one of the main reasons the current financial markets are in such a mess.
The lesson here if any is that the process of borrowing and lending is very much a game where the rules can be changed by both sides all the time. Its also not for the faint of heart. So if you want to be a borrower or a lender, make sure you’re up for the risk that goes with it.
Sure, as individuals we are conditioned to take on debt to drive the economy…homes, cars, credit cards. But business credit takes risk to a different level, requiring much more savy and fortitude to properly play the game.
The old expression, “neither a borrower or lender be” has been around for a long time for good reason.
But the reality of business is that leverage is required to make the economy go round. So if you’re in business, you’re in this game.
The challenge right now is that most business owners don’t realize that this is a game due to the fact that we have had an unprecedented good run over the last few decades and they haven’t previously had to deal with things not going so well for an extended period of time.
So regardless of your personal moral fiber and commitment to do the right thing, understand that from the impact of the current recession the financial world has now changed and the probability of you as a business owner or lender being on the wrong side of someone else’s agenda are much higher.
Business financing is definitely both art and science. Its also a mix of good intentions and bad, unfortunate circumstances and fateful occurrence.
In the words of Andrew Grove, “only the paranoid survive”. its not about whether or not you’re a hypocrite or not any more regardless if you’re a borrower or lender. Its about how well you play the game.
As far as morals and ethics go, you should always be prepared to play fair… as long as everyone else does.
I have often written that business managers and owners tend to leave the process of acquiring capital to the last minute and end up scrambling in many cases to get some type of financing in place before more costs are incurred or an opportunity is lost or some other dark consequence of not getting things done on schedule.
Not only does this very common approach to business financing create less than desirable results in the short term, but it also can wreck havoc on future business opportunities.
Let me explain.
The process of financing a business and managing a balance sheet is a lot about thinking three steps ahead as you try to proactively predict how things will unfold in the coming years and capital the business will require to operate within your predicted or desired path. And future predictions are not always going to be about growth. Sometimes the look ahead is going to be more on the gray or even dark side as you realistically or conservatively see a storm coming ahead and make a plan to deal with it that will hopefully lead to your long term survival.
Regardless of how you see the future, there is cause and effect in the field of view that needs to be factored into how you cash flow and fund your business.
This is why the decision making process of today can be so critical to what predictably is going to come next. Business financing done in haste most times creates a financing structure that will not easily allow for future moves without creating cost. In some cases, the capital acquired today will be a death sentence to the business if the future unfolds in a direction that is in congruent with what has been accepted or arranged.
An example of this would be an obsession with the cheapest sources of money. These sources not only can take an excessively long time to get into place, but they also demand close to extreme security positions and very stringent operating requirements that may or may not be met by expected future events. While cheaper money is always preferred over the alternative, the business has to be able to meet the requirements of the money, or be faced with demand to repay at likely an inopportune moment in time. And even if the business owner can comply with the demands of the money source, is there any flexibility left to allow for what comes next which might just require more outside money?
The process of thinking three steps a head requires that the business owner starts early and never stops looking for and understanding the available sources of business financing that are relevant to what he or she is trying to accomplish. The more pressed someone is with respect to securing capital, the less likely any capital required will properly allow for future moves.
The standard option most business owners and managers have is that any amount of business financing they are going to require over time is going to come from their bank or some other banking institution.
After all, banks and institutional lenders will regularly tell you that they want your business and can take care of all your business needs.
But the stark reality is that the Major banks and secondary lending institutions, especially the ones that are the most visible in the market place, are only looking for “A” deals and are frankly more interested in your investment portfolio, insurance policies, and any other financial service they can offer that tend to be far more lucrative and much less risky than almost any type of business loan.
And truth be told, the majority of small and medium sized business (SME) financing does not come from banks. Depending on whose numbers you choose to believe, the actual annual lending extended to SME’s is about 1/3 of what’s actually required by the market place.
But because the economy continues to go around and around, the money has to be coming from somewhere. And many times, these sources can be very unconventional compared to the formalized lending practices of a bank.
The key to any lending or debt financing arrangement is that the borrower has something of value to the lender than creates a basis for a loan to be made.
When the circumstances of a given business do not fit into the lending criteria of the primary or even secondary market sources, its time to look to more unconventional options.
Once again, the key is to understand the value you have to leverage and who would be interested in providing capital against specific assets you control. This can be anything. Patents, specialized equipment, strategically located property, etc. The possibilities are limitless. But unless what you have has a value to someone else, there is no business financing equation to work from.
As an example trade credit is a major form of capital provided by manufacturers and suppliers to move inventory through their systems. And while most trade credit is based on the financial strength of the customer, there are many variations to trade financing that come into play based on the value or opportunity available to the company providing it.
In most of these and other unconventional business financing scenarios, there is a steep walk away price to the borrower for not repaying the debt as written. The incentive of the lender is the opportunity to acquire something they consider as valuable at a discount or even at market price if its something that is exclusive or hard to come by.
Asset based lending is pretty much grounded on the premise that in the event of loan default, the borrower will either retain the security or knows how to liquidate it to get his or her money back.
But in reality, there are many, many unconventional loans provided every day from some of the most unlikely of sources.
So when you’re pushing rope up hill and have been turned down for the umpteenth time from the usual suspects, its time to think outside of the box and develop a business financing strategy that someone will be interested instead of continuing to push one that everyone clearly isn’t.
If you’re going to apply for business financing from an institutional debt lender, the time of year can have more of an impact on your application that you may think.
Like any business, a commercial lender has a budget, a fiscal year end, and financial reporting requirements.
As of this writing, we are currently in the October or the start of the fourth quarter of the calendar year which will be the fiscal year for many of the lenders out there. This means that banks, credit unions, trust companies, pension funds, etc., will be getting their books in order for their up coming year end.
For commercial lenders where the year has allowed them to already meet their targets, the last quarter is going to likely be characterized by a stiffer application of lending criteria with the intent to only take on additional loans that will lower the portfolio risk. Debt financing is a business and the people that run these organizations are going to be working hard to hit their targets to earn whatever bonuses may be available to them.
On the flip side, if a lending institution has not hit its budget by the fourth quarter and is even potentially a bit behind, there could be an opportunity to see a loosening of the credit criteria in order to get more business through the door before the clock strikes midnight on the year end.
For debt financing sources that don’t have fiscal years that match the calender year end, the same circumstances can apply.
At the beginning of the year, its not uncommon for lenders to start out with a more conservative approach to see how much low risk business will come their way. By the second quarter, if lending is below budget, the reins can once again be loosened in order to try and hit the lending numbers that will pay the bills and potentially those bonuses.
From a business owner’s point of view, it can be difficult to determine who is lending and who is less likely to lend based on the time of year.
Just keep in mind that money will tend to flow the most free in the second and third quarters, all other things being equal.
While there is no exact science to figuring out how this can impact your business financing efforts, it can be a good idea to stay connected to financial consultants and industry experts that have a better sense as to what the main players are doing at a given point of time based on whatever inside or quasi inside information they may have access to.
Here in 2010, the market in general appears to have slowed down going into the fourth quarter. While it may be too soon to draw conclusions as to what to expect from different lenders for the next few months, its definitely something to stay aware of, especially if capital is going to be required for your business in the near term.
Ok, so perhaps this is a slight exaggeration as I probably can recall a few business financing deals I’ve worked on over the years that went fairly smoothly, got closed on time, and provided the business owner with what they were looking for without any grief.
I can also easily count these situations on one hand and have some fingers left over.
The process for securing capital, especially since the most recent recession is gotten harder to achieve in most cases, most of the time. Its not that everything can’t fall into place with a funding process, its just not likely to happen and you need to plan for some challenges, costs, and time.
The basic adage is to prepare for the worst and be pleasantly surprised when everything comes together without a hitch.
This may seem like very pessimistic, the glass is half full kind of thinking and it is. But in all my years of working in this business, there is virtually no such thing as an easy deal. Easy deals or easy flowing money falls into the 1% probability category slightly ahead of your odds for winning the lottery.
The take away message here is not that is all gloom and doom and that you’re not going to get the capital you require.
No, that’s definitely not what I’m saying.
What I continuously tell business owners is to get committed to the process as early on as possible and then stay invested in it as long as required and provide the resources and time necessary to increase the probability of a positive result.
In many cases, the business financing process is grossly over simplified and under estimated by entrepreneurs who would rather stick needles in their eyes than have to develop a detailed financial knowledge about any financing request they need to make. Money is a necessary evil that shouldn’t be that hard to come by, or so the thought process goes.
Unfortunately, this thought process eventually leads to failure in many cases in that money that gets secured tends to come from the path of least resistance which is typically not the most ideal form of funding available which can start the business into a death spiral it may never recover from as it continually takes on poorly suited forms of capital that will only reduce the probability of profitable results.
And when I say you need to commit to the “process”, the process is whatever is required and however long it takes to get the right match of money and opportunity.
If you say you don’t have the time for what’s required, then start the process earlier, get farther ahead of when capital is required, avoid being backed into a corner and forced to take what you can get.
Finding easy money that fits your requirements when you need it is always possible. But is it probable?
Its not uncommon that business owners and managers in search of capital, especially those from businesses with sales under $1,000,000, seek a source of debt financing for their business that doesn’t require them to take any personal risk beyond their investment in the business.
While every business owner would prefer to minimize risk as much as possible, its unrealistic for new or developing businesses to expect lenders and sources of debt financing to take a disproportionate amount of the risk associated with a particular funding request.
In an attempt to avoid risk, owners can spend a lot of time looking for something that may not exist…that being debt financing without any form of a personal guarantee. And while personal guarantees are not always required, they will most likely will be for cheaper sources of debt financing.
And from a lender’s point of view, its not that they are necessarily gaining a great deal of additional security from a personal guarantee, but what they are gaining (at least in their mind) is 150% commitment from the business owner to do whatever it takes to make the business work, versus throwing in the towel when things get tough and letting the lender take a bath.
As businesses grow in size and increase their financial stability through the accumulation of retained earnings, there will be less of a need for personal guarantees to balance off the risk scale.
Personal guarantees or covenants are also closely linked to the type of lender you’re dealing with as well. When there is security pledged, lenders that are either good at liquidating assets or controlling them will be less concerned with personal guarantees compared with a lender taking an unsecured position or accepting security that they aren’t very adept or experienced at liquidating.
The key here is that the risk needs to be somewhat proportionate. If a business owner is asking a lender to take 80%+ of the risk, then it stands to reason that a personal guarantee is going to be required. In situations where there is more risk sharing between the business and the debt financing source then its more likely that a personal guarantee will not be required or at least a partial guarantee may be considered.
As I mentioned earlier, guarantees tend to be linked to the cheaper sources of money which relates to low risk positions for the lender. Higher lender risk will almost always mean a higher cost of financing to offset the risk if the lender is going to be interested in extending funding at all.
While the goal should always be to reduce risk wherever possible, you also have to realistic in terms of taking on a reasonable share of the lending and borrowing risk being entered into.
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.
Recently I was working on two different business financing deals. The first one was for a well established business with great cash flow, great credit, and a strong business model. The second financing scenario was refinancing a business that was struggling to cash flow growth and was trying to overcome many of the challenges that come with a start up business.
While on the surface they couldn’t be much different, the one thing they had in common was the amount of time it was taking to get the financing they needed into place.
And it wasn’t necessarily hard in either case to identify the potential source of business capital that could satisfy their needs. The challenges in both cases came from getting a final commitment in place and getting the funding advanced.
This is a very common occurrence these days post 2008 thru 2010 recession (which for many is still not over).
The lending process and related bureaucracy can be totally maddening to any business owner and manager who is used to taking charge of a situation and getting everything covered off that is required, within a certain time frame.
When it comes to business financing, the process can only be followed, not forced. As soon as you put pressure on a lender or a provider of capital, it will also inevitably lead to a no or decline of an application for funding that may have otherwise gone in your favor.
This is where patience comes in.
Once you have a source of financing lined up that you are comfortable with, its time to gear down and start moving at the speed of the lending process, which can be delayed or slowed down for any number of reasons, most of which you have no control over.
And when you start running out of time on a deal or funding requirement and the financing is still not either approved or available for funding, the tension and pressure of the moment can push you over the edge.
But if you want the options you’re working on to remain options, you’re going to have to create whatever contingency plans are necessary to get you through to the other side of the process where the money is.
Remember that the more people that are involved in getting everything covered off for a lending approval and disbursement (appraisers, accountants, lawyers, consultants, credit committees, customers, suppliers, etc.), the higher the probability that the process will take more time than less.
Sure, everything can come together quickly and be in place ahead of your expectation. But most of the time it won’t, and without a healthy dose of patience, good options can quickly be destroyed, putting you right back at square one.