BY NORMAN G. GRILL
The success of your business loans should be no accident. Every financing arrangement you make needs to be a carefully planned strategic move with reasonably predictable results. While a lender must be picky about its borrowers, the same holds true for you choosing a lender. The key is to find the right fit so that external financing can serve a strategic purpose.
From afar, the commercial lending process can appear comical. On one side you have the lenders, who want to manage their risk by loaning money to only successful business owners. On the other side, you have the business owners ”” many of whom believe they can”™t truly become successful until they get the money.
To avoid this disconnect, you have to approach business financing as a partnership rather than a provider-customer relationship. If you were going into business with someone, you”™d want to clearly understand his or her vision for your venture. It”™s the same with lenders.
Let”™s say you”™re asking for money because your company has become so far behind on vendor payments that it needs the working capital to catch up. In this scenario, you”™ll need to make a case for how catching up on payments will allow you to get the raw materials needed to make a big push forward on sales.
Or you might need the money to open a new location in a city nearby. Here you”™ll have to produce some solid market analysis that explains to the lender why your business stands a good chance of succeeding in a new locale.
The bottom line: Before you ask for a loan, devise a clear plan for what you plan to do with the money and how you”™ll repay it. You and your top managers should be able to verbally articulate your plan, but craft a written statement, too.
The statement doesn”™t need to be a 50-page proposal. It can be as short as one page as long as it clearly describes your strategic challenge, your plan for overcoming it, and where and how the lender”™s money plays into this solution.
As mentioned, every financing arrangement is a partnership. So you should be just as picky with your lender as that lender is with your financials. If you have a long-standing relationship with a local bank, make that your first call. There”™s no understating the importance of good communication and an amicable rapport when negotiating terms, making payments and dealing with whatever business complications may come up.
But should your local bank not offer the size or scope of financing needed, or if you”™d just like to get an idea of what else is out there, don”™t hesitate to shop around. Look for a lender with multiple loan products so you have a better chance at structuring one to your liking. And get some referrals regarding the strength of service and support.
If yours is a small business, check into the availability of Small Business Administration or other government-backed loan programs. These are often designed to boost local economies, so you may be able to get favorable terms and rates.
Last but not least, don”™t limit yourself to only traditional lenders. In today”™s competitive lending environment, businesses have a variety of alternatives to consider. These include angel investors, online peer-to-peer lending networks and crowdfunding.
This is the era of “big data.” Lenders are certainly active participants, keeping a keen eye on metrics that help accurately estimate risk of default.
As you look for a loan, determine how each prospective lender will evaluate your default probability. Many lenders do so using spreadsheets that track multiple financial ratios. When one of these key ratios goes askew, a red flag goes up on their end ”” and should on yours as well.
Bear in mind that not every lender may use ratio-based evaluative methods ”” or use them alone. Some use community-based scoring, by which a selected group of finance professionals rate and review companies based on their payment histories. Others use proprietary commercial-scoring models that use creditor reports to develop credit scores for businesses.
Ideally, you should never view external financing as a reactionary measure. Approach any business loan as a strategic move ”“ not only in the planning stages, but also in the execution of the arrangement and while you”™re repaying it.
Norm Grill, N.Grill@GRILL1.com, is managing partner of Grill & Partners LLC, (GRILL1.com), certified public accountants and advisers to closely held companies and high-net-worth individuals, with offices in Fairfield and Darien, 203-254-3880.
