Many businesses have made a full recovery in 2021, while others are at least seeing light at the end of the tunnel. The economy is returning to some semblance of normal. Not to be overlooked in the midst of this good news, is the importance of lenders in the continued path forward. What does your lender think of your business right now? How are they viewing you?
Whether simply seeking a renewal, or rather additional financing for growth, an understanding of your lender’s view on your business is critical. Even with longstanding business relationships, the tumult of the past year and a half has impacted lenders, and how they view their clients, in multiple ways.
Here are 5 steps a business can take to successfully manage its lender relationships going forward.
1. Start the conversation early – Do you know how your lender views your business at this point in time? Regardless of how soon a financing event will arise, there is no time to waste in answering these questions. Gain as much insight as possible as soon as possible. Discuss where the business is and where it is headed. Discuss what the business might need going forward. And most importantly what does the bank want to see by way of information on the business?
2. Know how 2020 is evaluated - A key piece of information to understand is how the lender views this past year’s pandemic. Most businesses felt significant economic pain, for at least some period of time. How is the lender taking this setback into account? Some lenders are looking at businesses leading up to the pandemic, and then ignoring parts of Q1 and Q2 for example. Some are studying month over month financials very carefully starting pre-pandemic to present. Others are including some or all of the PPP proceeds in evaluating the historical financial performance. Even if there is no new financing need, does this disruption affect covenants? And for the lucky few that saw record years in 2020, the question of sustainability arises. For example a company that sells cleaning products may have seen a massive uptick that the bank may question whether it is sustainable. Being armed with this information will guide next steps.
3. Prepare good monthly trends – Regardless of how things are being evaluated, they are being evaluated in more granularity. This makes accurate month to month trend information essential keep track of. Can you produce this information? Ensure that you have the ability to demonstrate a picture that supports company performance. In turn, this should excite a lender to continue and grow a relationship. Take a step back and view your monthly history. Does it support sustained growth? Are there a couple blips along the way that require explanation? The information you provide will tell a story that may require additional context, but if the information is poor, you may lose out before even getting started.
4. Forecast, forecast, forecast – All lenders we are seeing want a forecast into the future. They are not expecting 100% accuracy, but a picture of management’s best idea on where the business is headed is valuable to them. This might be just for the balance of 2021, possibly 12 months from now, or even through 2022. Ask the question and be prepared to show what the future might look like. And just like historical trends, be prepared with the key assumptions and context that a lender might ask about.
5. Limit risk – Banks are not in business to take big risks, so creating a picture for the bank that mitigates risk is the final cog for a business. How does your liquidity look? What about the collateral the business has? How do you show this to the bank? How can you demonstrate an ability to confidently repay any existing debt, but also support additional capital? For many businesses, using the steps above to demonstrate sharp management through and out of the pandemic can be a great source of confidence.
Capital is out there for the right opportunities, but lenders are not obligated to lend you money. Sell potential lenders on the promise of you and your business. Create a holistic business case for what you are seeking. Get out there and grow boldly.