I Can’t Get the Financing I Want
For most small businesses, it is extremely difficult to go it alone with capital, and as a result, those same businesses have debt – for equipment, real estate, working capital or a combination therein.
Unfortunately, many of these same business owners find it challenging at times to obtain the financing they need.
Lenders exist to make money and manage their own risk. Over the years in helping countless businesses prep for the right financing, we’ve heard common phrases from CEOs such as, “the bank just doesn’t get it” or “they changed the rules” or “I just need to have another conversation.” The reality is, it is rarely that simple. There may be several factors at play. As a business owner, understanding what could be holding you back is critical to getting the capital you want and need not just today, but into the future.
Wrong loan structure
In most businesses we come across, there is room for improvement with the way the current debt is structured. That not only means that your financing is not working for you to the fullest today, but that it also could prevent you from getting the next deal done. A common challenge is using short term financing for long term needs. Revolving lines of credit are meant to finance short-term working capital, such as accounts receivable and inventory. However, if you are always bumping up against the maximum amount on the line and the line is rarely moving up and down, that may suggest that you are really financing what a lender would call “permanent working capital” and should really be financed in the form of a longer-term amortizing loan versus interest only. We have also seen manufacturing and distribution businesses that do not use lines of credit at all, and only use long-term financing on equipment to fund operations. Matching the type of financing with the use is always step number one.
Wrong partner
Owners of evolving businesses need to occasionally assess their current lending partner. What worked yesterday, may not work in the future. Perhaps you have been a customer of your community bank for years but are now one of the largest borrowers they have, and you cannot grow further with them. Maybe your current bank is really ratcheting up the pressure on you, because your performance has triggered a yellow flag or two, or your industry is not as preferred in their portfolio. It could also be that your best match is a non-bank lender, such as an asset-based lender. Banks can be quite selective in the types of businesses they finance. This could be limited by industry, size of business, geography, historical performance, and/or the amount of debt. Do you know the sweet spot for your current lender? Or the ones you are talking to? Are you in it? You need to answer that question.
Bad data and inadequate reporting
Lenders want visibility into your business, on an ongoing basis to monitor performance and in underwriting to evaluate a renewal or new financing. They will carefully study your internal financials, assets, profitability, and cash flow. The credit department at a given lender will “spread” numbers creating an internal financial summary to look at key trends and metrics, and any anomalies. They will often also request underlying data, such as sales volumes, key customer sales, segment information or inventory detail. Your business will be under a financial microscope. If you cannot produce timely and accurate information, that will likely raise a flag and cause a loss in confidence. Too often, we hear lenders complain that financial statements are inconsistent, historical numbers moved, or information simply is not available. Not having solid timely reporting for a bank is like expecting to hop on your next flight without a boarding pass. Timely, easily understood reporting is very doable for even complex businesses. Sadly, the underlying business could be performing fine, but poor reporting is what shuts the door on financing because the lender simply cannot connect the dots. Don’t let this happen to you.
Lack of a cash management strategy
Lenders, particularly banks, pay very close attention to the flow of cash within a business. If you cannot manage your own cash well, a lender is going to be extremely nervous about how you can manage theirs. Constantly being pinched on cash is a real warning sign for a lender. Going back to the revolving line of credit example, when that line does not revolve, and just stays static, that suggests a lack of cash management. Managing a line properly gets a lender a lot more comfortable in adding credit. Are there significant occasional outflows that come at the wrong time, that create peaks and valleys? Cash, not profit, is how a lender actually gets paid back, so understanding cash flow is just as important if you are pursuing equipment financing or an expansion. While a bank will evaluate your ability to cash flow a loan, you should too. Too many businesses misjudge the amount of financing they need and can afford. To go a step further, this management and analysis does not just apply to history. The ability to provide cash flow forecasting provides huge weight in a lender’s evaluation and confidence. Can you accurately forecast your cash flow? That is a critical capability for any business.
The Entrepreneurial Story and the Financial Story Don’t Match
A common issue is that the story you are telling on the business is not backed up by the financial picture. This can happen for a few reasons, but all of them need to be addressed. Bad accounting can prevent the financials from depicting what you know to be happening in the business. For example, accounting to minimize taxes creates a very confusing first impression when the owner is preaching profitable high growth. We have seen this kill countless lending transactions. How well do you forecast? Is your ability to forecast lacking? Is there a history of not hitting the forecasts? Do the assumptions in your forecasts have a disconnect with reality? Or is just simple flatline growth forecasted without justification?
Lenders will look at historical and forecast information. Can you poke holes in your own numbers? If you can, so can a lender. Do they truly make sense to you? When the financial story and the entrepreneurial story are complimentary to each other, due diligence is an easier, less painful process, making it far more likely you get the terms you desire.
The sage advice that the best time to seek money is when you don’t need it is true. Preparing in advance, understanding your options, and evaluating how your business looks on paper should all be a frequent part of your mindset. Earn a lender’s trust and confidence. Find the right partnership, not just a deal, and grow boldly.
