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What Is Holding You Back From Borrowing The Money You Need?

When you hear from someone that business financing is difficult for them to obtain, chances are they have misunderstood  the financing process and made a critical mistake in their strategy, resulting in being "turned down". Understanding the proper approach and the loan process helps develop a successful borrowing strategy.

Briefly, first you should make certain assessments regarding the investment requiring funding, your organization and its capabilities, and current economic conditions. Next, target lenders capable of providing the funds you need and develop a strategy to negotiate the loan.

The investment assessment entails asking questions about the viability of the project ie. is it a feasible, sound project and the best solution among alternatives considered? Furthermore, the payback of the project must exceed the initial investment and its ongoing costs, and be within a reasonably short period of time. Today's rule of thumb is 2 to 4 years for highly technical investments, longer for equipment expected to have a greater useful life.

The company financial position must also be considered. The current and anticipated capital structure, the predictability and amount of present and anticipated cash flows, and the present and anticipated capability to repay the debt must all be assessed. Furthermore, the available security for the loan and its likely value to the lender must also be considered. Be prepared to ask for an adequate amount to successfully complete the project. Under-financed projects are difficult if not impossible to manage.

Finally, you must make an assessment of current and near future economic conditions. Current interest rates and trends, the lending climate, the state of your industry and your market, and the state of the economy in general must be addressed.

Once you have made all necessary assessments and preparations, and determined how much you need and what you are prepared to "pay" for it, you can target appropriate lenders.

Lending sources are generally dependant on three important factors. These are the stage of your business, the asset or project financed or transaction type, and the type of participants in a particular lending market.

All lenders assess loan applications in a similar manner.

First they have to be able to "do the deal". This means there are no administrative or policy constraints. Sometimes the institution has reached the limit of their exposure to a certain type of business, say car dealerships, and they will do no more financing in that particular sector.

Assuming they are willing to lend to the sector, lenders then have to gain confidence in a particular deal which they do by assessing the following parameters. They are, in no real order of importance:

  The borrower's character, experience, history, and their capability to successfully complete the project funded;

  The viability of the project and probability of success;

  The adequacy of alternative sources of repayment;

  The structure of the deal and capital invested by the borrower;

  Projected cash flows and the ability to repay the loan;

  Security available for loan;

  Conditions in the lender's industry and the economy in general that may impact the borrower.

A loan application is normally filled out by the lending institution, listing the borrower's vital statistics (ie name, address etc), asset and liability information, sources and amounts of income, names and addresses of other creditors, and the amount and purpose of the loan. Borrower financial statements are also generally required and loan application fees may also be payable.

Not all financings require a formal business plan. This is generally dependant on the size of loan, the object or nature of the deal and normal lender criteria. Where a formal business plan is not required, you should as a minimum document financial projections under differing assumptions. This "what if" analysis should be included as part of the application.

Lending institutions process the application through their approval process. Various management levels have set approval limits. The largest loans require approval from the institution's Board of Directors and the smaller loans normally only require branch or regional office approval. Once the loan is approved in principle, it is structured by the lending institution and "offered" to the borrower.

The offer normally details the following: amount and structure of the loan rate of interest and method of calculation repayment terms, loan covenants and agreements, and security for the loan.

At this point it is prudent to negotiate the terms because what you were prepared to "pay" is unlikely to be completely contained in the lending institution's proposal. For example, interest may be negotiated down, amortization periods may be altered, loan covenants may be made less restrictive or security may be changed.

If you are turned down by a lender, make sure you know why. You can then either alter your plans to make the deal more palatable or you can continue "shopping".

In summary, there is a process to obtaining a loan. You should assess the project, your financial structure and the current environment to ensure you develop a sound investment\financing strategy. You must then target lenders who are most likely to be able to lend to you given your particular needs and set of circumstances.

Developing a formal business plan may or may not be required but as a minimum you should provide the lender with the information needed to gain confidence in your proposal and abilities. Being prepared with information to support their assessments is vital to creating the required impression.

And negotiation is an important part of the process. Lenders are prepared to give a bit here and there because they often ask for more than they need. Finally, if you are turned down, make sure you know why. It is vital to your own understanding of the deal and allows you to alter your strategy and succeed on the subsequent attempt.


© 2015 John B Voorpostel
CPA, CA, CMB
iaccountant.ca

 

 

 
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