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Commercial Financing Applications Need To Take A Different Approach
With all the changes going on in the capital markets these days, business owners and managers need to reconsider how they go about applying for commercial financing.
The typical approach taken over the last several decades by small and medium sized business owners when applying for business financing was to start the process late and provide basic information including cursory business plans and thinly supported projections. Because of the strength of the overall economy, lenders and investors were comfortable with making lending or investing decisions from basic information.
This is not to say that considerable effort didn’t have to go into the process, but compared to today’s market, the overall lending requirements and demands for information have significantly increased.
The direction of greater focus is on management of business risk and the lender or investor protection against funding loss. For debt financing in particular, lenders are more focused on asset security and less interested on primarily cash flow based lending.
This is a significant departure to what businesses have gotten used and its a change that many still have not made when seeking financing. And the reality is that failing to change the positioning of a commercial financing application so that it aligns more closely to market requirements will likely result in no new capital coming into the business.
This is a real problem not only for dealing with short term cash flow deficiencies that directly impact operations, but also for all the time and effort that can go into long range planning that may not align with securing the capital required to bring things into fruition.
A better approach for debt financing needs to become more focused on hard security, details on customer and supplier financial profiles, projections that cover a longer period of time and have well supported variables, projections that include balance sheet, income statement, and cash flows, and a business plan that provides more tactical details and less theoretical potential.
Financing strategies are now going to have to be developed farther in advance to accommodate a very unpredictable and picky capital market focused on good deals where the risks are clearly mitigated.
Leaving things to the end of a transaction or waiting to close to the time when money is required is going to be a dangerous practice as the probability of getting anything of significant size into place quickly is low.