I’ve written before how a business financing application has everything to do with the story.
Today I’m going to take that one step further and talk about the three main components of the story and how they collectively wrap and tie all the other information together.
When I worked in the corporate world, any time I had to report on the overall health of the business at a given point in time, the higher ups always wanted to know three things:
Where are we at right now?
How did we get here?
Where are we going?
These are the same three questions that any serious lender or investor is going to want answered as well. So instead of just throwing a bunch of paper at them in the hope they get what they need, the process is a lot more effective if every element of a business financing application package is linked into the answer to one of these three questions.
For instance, the answer to “where are we at right now” is centered in the current financial statements, appraisals, estimates, quotations, bank statements, and so on that reflect the here and now.
“How did we get there” is partially answered by the historical financial statements of periods past. And “where are we going” is partially covered off by financial projections.
All the numerical reporting and projections are tied together from past, present, and future by the overall story.
Like any good story, the information has to flow from beginning and lead the reader in the right direction versus confusing the heck out of them or causing them to become frustrated with inconsistent information that leaves them unsure of what’s really going on.
But to really make the overall business financing story holds water, it must address all three questions and make sure the answers to any one do not contradict the answers to the others.
A well written business financing application is not going to assure that you’re getting the capital you’re after, but it will increase the probability of the lender or investor clearly understanding not only your request but the supporting information, which can be a major challenge in and of itself.
Next time you’re putting a business financing application together, take a few minutes to review it when you’re finished and see if you’ve answered each of the three questions. If you haven’t covered them off sufficiently you should consider taking a bit more time and tying up all the loose ends before submitting your request.
I recently worked with a client seeking financing from their business where the business is well established, has an excellent balance sheet, and is very profitable. The Owners were experienced, established, and had a solid track record of performance.
So why were they looking for financing?
Their primary and only institutional lender could no longer underwrite the type of business they were in.
In the current economic climate, this is becoming a more and more common occurrence for even well established small businesses.
For this particular client, they were actually able to secure better business financing than the package they had.
But while you might think the debt financing could be easily replaced given the financial strength of the business, this is not always the case. For this particular client, while the end result was positive, there were not many interested lenders at the very point in time they required financing. And with the institutional lender they are working with now, there is no guarantee they would have done this deal 6 months ago, or would considering doing it at all 6 months from now.
The point here is that business financing can be all about timing where the needs of the business need to line up with the needs of a lender.
And even when everything lines up, there is no way to know how long that relationship will continue. As a business owner, you have to always be prepared with plan B in the event that a lender changes their business model or portfolio focus and leaves you as the odd man out, even though you’ve never missed a payment and have complied with all the lender requirements.
So the second takeaway from all of this is that as a small business owner, you always need to be on the look out for a better source of financing and an alternative source of financing. There is no true loyalty in this game, and for the most part it is a game in that both borrower and lender rarely disclose everything to each other in terms of their go forward business plans, leaving a certain amount of uncertainty in play.
Unfortunately, most business owners or managers only focus on business financing when they need money. Because of the “point in time” aspects of business finance, this can be a very dangerous and expensive approach to take.
Even for the most well established and profitable businesses out there, if they still rely on third party financing from lenders or investors, they always need to be asking themselves “what do we do if the lender or investor want their money back right now?”.
By proactively staying on top of the market and your relevant options, you stay ahead of the curve and ready to deal with the unexpected.
Not only have we been witness to a large number of global bank failures in the last two years, but there have also been a number of high profile lenders that have downsized their operations in certain areas and completely pulled out of some jurisdictions all together.
The resulting shifts in the business financing sands have created both holes in the market and opportunities. The business lenders that remain now are presented with additional opportunities to expand their portfolios, provided they can adapt their services and risk management towards a new opportunity.
For the business owner or business manager, this has created new commercial financing options in the market to replace what has recently disappeared. Although the level of overall financing competition in all slices of the market is still down overall, the expansion by existing players is a welcome improvement.
At the same time, don’t expect these new programs to hit the market with any great force. While the lenders involved are going to be serious about exploring the identified opportunities, they are most likely to start by wading into the shallow end of the pool as they take their time getting used to water of a new market or niche.
So while it may be very much worth your while to explore these new options that could now be available in your back yard, you’re going to have to have some patience as market expansion in the world of business financing is more of turtle versus hare approach.
But as time goes by, positive experience will also lead to program expansion and more aggressive lending practices. And as the economy continues to turn around, more changes can be expected in terms of the lender mix and offerings in any market.
This will also have a dramatic impact on supply, rates and terms in certain locales where the dominant lender in a category has completely disappeared and competitors decide on their interest in filling the void that remains.
In a time when lending markets continue to trend through uncertainty its good to see some of the participants prepared to venture out into new areas where opportunity has become available.
Hopefully this will soon become more of the norm versus the exception.
Assuming that you’re business requires a third party source of financing to provide the capital necessary to operate and drive your strategic plan, then a business financing strategy is definitely something that should be developed and kept up to date.
Most businesses operate on a point in time basis where they look for financing when they need it but don’t have a longer term picture of how the financing they accept today will impact their needs tomorrow.
A business financing strategy is more focused on making sure that any incremental commercial financing you secure will be congruent with what you already have in place and with what you expect to require in the near future.
Most lender models offer no help with this exercise either as lenders tend to work on a very narrow and highly static point of view. The ideal client for any debt lender is one that is very profitable, requires a relatively consistent level of capital to operate, and does not got any wild growth plans or ambitions that could upset the current stability of the business operations.
This is in direct conflict with businesses that are continually trying to grow and take on new opportunities or trying new approaches to gain market share. And when financing decisions are made in this fashion, the business owner or manager is constantly trying to fit round pegs into square holes.
Here’s an example.
A business owner wants to exit the business by selling his interest to a co owner for several million dollars. The business has a strong balance sheet and solid profitability so bank or institutional corporate financing should be able to be secured to accomplish the process.
But the owner wanting to exit has put a time limit on the transaction in terms of the price he’s prepared to sell his interest for. Because no senior lender relationship is in place, the remaining business owner has to start from scratch to secure financing.
Because the time available is not sufficient to get through a bank or institutional application and assessment process, a bridge financing solution will need to be entered into to meet the deadline.
Nothing wrong with bridge financing, other than its very expensive and may not be the best operational fit for the business in the interim with respect to how the financing is structured and monitored.
At the same time bridge financing is secured, the now sole owner will need to try and secure a longer term senior lender facility to pay out the bridge financier in order to save 50- 75% or higher, of the financing costs he’s paying.
Once the senior facility is in place, if the business has any plans for growth that require more capital in the near future, there is no guarantee that the new senior lender will be able to provide incremental funds as new opportunities present themselves, creating a new financing challenge.
An up to date business financing strategy could have not only avoided the whole bridge financing situation, but could have also made sure that future financing facilities were going to be congruent with future business plans.
While some of the leg work and modeling for a business strategy can be outsourced, it is the responsibility of the business owner or manager that a working version is in place and that it properly factors in 1) the present balance sheet; 2) potential future business financing requirements, 3) contingency planning such as management buyouts, shot gun clauses, etc.
A lack of a business financing strategy can destroy significant value in terms of 1) higher financing rates, 2) lost opportunities, 3) opportunity cost of time and the real cost of delays.
One thing about operating a business and having a business financing requirement in Toronto, there are no shortage of commercial financing options available to you.
The Big smoke is the center of the Canadian financing universe with several lenders present in virtually every conceivable business financing classification.
Because of the population concentration within 50 miles of down town Toronto, many sources of business loans, leases, and equity investment don’t even consider deals immediately outside of the Greater Toronto Area and prefer to only work on projects in their own back yard.
As a result, the physical location of the business, especially for anything that is asset intensive, will have significantly more financing options within the GTA area than even a short distance beyond its boundaries.
Because many sources of biz financing come from what we refer to as boutique lenders (niche focused sources of financing with typically one physical location and limited staff), there is a need for the business to be close enough for the lender to do a sight visit in the application stage of the process as well as to be able to easily come out to the location to monitor the account or work through issues that may arise.
Of course all the national lenders are also going to be present in the Toronto area. But the presence of this higher concentration of niche lenders compared to other areas of the country can provide many more short term and long term financing options to a business that would not otherwise be available if they were located even a 100 miles away from the GTA.
These expanded lender options also extend to private mortgage lenders that have a much higher concentration in Toronto than anywhere else in the country. Because of the woes of the stock market over the last decade, there are more and more people becoming private mortgage lenders to gain a more predictable and secure return, especially those in the baby boomer category that are at or near retirement and have a desire to reduce the overall risk level of their investment portfolio.
As a result of all the new entrants into the market, private mortgage financing has gotten more and more competitive, especially for small and medium sized commercial properties where private mortgage lenders can come close to rivaling bank interest rates in some cases.
All of this provides more choices for Toronto based businesses which can allow business owners and managers to consider different business financing strategies to meet their capital needs.
When anyone looks for financing of any type, they are intuitively looking for the best deal with the best rates, the best terms, the best fit for what their doing.
And many business owners will start out with their own set of criteria of what they are looking for in terms of amount of money and what the related terms and conditions need to be.
The challenge is then how fast their perception of what’s available to them can be lined up to the reality of the capital markets at any given point in time.
Let me explain.
At any given time, a business may be eligible for certain types of financing rates and terms, but what lending source can provide it?
When the overall market is operating during a period of sustained economic growth, more lenders will be providing similar terms on similar deals most of the time.
When the market is operating during a period of uncertainty like the current recession, the same financing opportunities can still exist for a given business, but its likely that there are fewer lenders that will provide the best potential deal at any given point in time.
The reason is that economic uncertainty increases risk and losses for debt lenders just like any other business. And to protect themselves, some debt providers will leave the market all together for certain types of deals for a period of time, some will cut back, some will expand their criteria for approval, and so on.
The result of all this is that the ultimate best commercial financing deal can be very hard to find in times of greater economic uncertainty.
And when most financing requirements have some sort of time line that needs to be met, the best deal can very well be the one that can be approved and arranged in the time required.
This doesn’t mean what you can get a hold of is the best potential deal in all respects. It just means that its a source of money you can make work in the time you have.
Searching for a better deal is always an option, but there are two things to consider with looking elsewhere. First, you may run out of time and either miss out on the opportunity you’re looking at, or incur additional costs from the delay. Second, if you are unsuccessful finding something better, there is no guarantee the first deal is still going to be available to you later, especially in strained economic times where lenders are known to change their minds or lending direction quickly.
Its a bit like the old “bird in the hand is worth two in the bush” saying. Sometimes a deal that’s close enough to your requirements needs to be good enough, at least for the short term until more predictable options are available.
If your business is technically not eligible for a certain type of financing, no amount of detail provided in your application is likely going to help swing the lender in your favor.
There is no question that a well prepared application package that is well organized, informative, and visually appealing can help you impress a lender and for marginal deals that are just on the bubble, perhaps this can put you over the top.
But the bigger concern with business applications is to not talk yourself out of biz financing that you would be otherwise eligible for, but still get declined due to poor, inconsistent, inaccurate, misleading, or even false presentations.
The application package you submit should be designed to present the specifics of the business as accurately and clearly as possible. And while this is the intention most business managers and owners, they cross themselves up by not making sure that all the information provide is consistent and relevant to the case for business financing they are trying to build.
Here are some examples of what I call business financing application Faux Pas.
Key takeaway: Reconcile your numbers. Go through your draft submission and make sure there are no inconsistencies from one set of statements or forms to another and that the information is consistently described and presented accurately.
Key takeaway. Make sure you answer the following questions: what is your plan to market your business and what is it based on? Customer or prospect letters of intent, conditional purchase orders, and market research clearly stating what certain segments of your market want make your projections and assumptions more believable as well. And all income and expense assumptions should be supported by unique and clear logic that can be substantiated if required.
Many business owners feel like spending too much time on a business application is a waste of time, and that can be true if the business case is easily supported. On the flip side, a poorly prepared application package or one that is thin on pertinent information is not likely to get you anywhere, even if the actual business can support the debt being requested.
A business financing application is also a reflection of how you attend to business and the level of detail you invest in managing the business and managing risk.
For a new financing source, its also the one chance to make a first impression that could be lasting.
Bad assumptions are a common reason for many of the problems small and medium sized business owners have locating and securing business financing when they need it.
Here are some of the more typical bad assumptions that get made on a regular basis and either inhibit capital from being acquired or cause a business to face serious short term repayment demands from lenders and creditors.
The key point I’m trying to make is that the process of business financing is not easy by any stretch, especially if you want to secure a financing facility that best meets your requirements. Significant lead times should be built into the process of locating and securing business capital, especially in the current recessionary environment. Proper cash flow management and credit responsibility are also very important aspects of any lender decision making process.
From both a borrower and lender point of view, we are seeing more of what I call business financing hypocrisy.
Lenders are interested in your business until they’re not interested in your business at which time they will call demand loans, cut back on lines of credit, term out lines of credit, increase interest rates, and invoke whatever get out of jail free cards they may have build into their funding commitment to the business.
Borrowers are just as bad in that they at times will promise everything but the moon and the stars to make the lender comfortable with a capital request, but when things don’t go according to plan and loan obligations can’t be met, the borrower calls his or her lawyer and tries to come up with a legal strategy to basically get around having to honor his or her promises.
When the economy is going well, these types of scenarios are played out very infrequently. But when a recession hits, as it has for the past two years, business financing hypocrisy is everywhere and its every man or woman for themselves.
The net result of this type of two way hypocritical behavior is that the financing markets are slowly down to a crawl in many sectors and geographic regions.
Lenders are asking a lot more to protect themselves with most commercial financing decisions now focused on asset based security and risk management.
Borrowers try to protect them selves by constantly looking for a better deal as they don’t like the changes in lender requirements and search for someone who is more in line with their expectations.
To say there is a lack of trust from both sides overall would be an understatement. In tougher economic times, most people tend to take a more conservative approach.
For the desperate borrower, its basically a take it or leave it market with the lender setting out what they are prepared to do without really any flexibility.
For better deals, borrowers have become more patient as lenders are having trouble hitting their borrowing targets which is the way they make money. So for good deals, there is a high level of competition and as a result, a patient borrower can find some pretty good deals as lenders cut margins to only secure solid opportunities.
But regardless of who is in a position of strength or weakness, promises made by either side are very weak. Business financing has become a game where borrowers have to become better players to keep up with the changes in the capital markets.
If you have a business financing requirement or problem you need assistance with, give me a call and we can go through it together.
In my last post, I laid out why its become more important for business owners to have a more formalized business financing strategy in place on an ongoing basis for their business.
Here are some additional reasons why this has become more important in the current market.
This speaks to a more conservative approach to third party financing, whether it be debt or equity, until some reasonable amount of stability returns to the capital markets.