How to get your business ready for debt funding

Funding your growth plan

As a business owner you may not want to accept outside funding. It allows outsiders to influence or control your business decisions. Running a business like yours may not be their core competence. But they may have experience with managing money. That would make it difficult for them to stay away once they invest. So why get into this hassle?

Once you have a strategic plan for business growth, you need to give it legs. You might need funds for assets like property or equipment. Funds can also help increase the working capital and ease the stress on work flow. These are all obvious reasons.

There is another perspective for you to consider. Most small businesses do not have a Board of Directors. Without one, businesses may lack an unbiased view of how bankable they are. A loan application process is an opportunity to get an expert opinion on your strategy.

What type of funding do you need?

It may take a while for business owners to decide to accept funds. The next question they have to answer is whether they want debt or capital. Debt has an identified financial cost to it but capital is bringing in a new co-owner.

New shareholders may mean less financial burden. But you would have to share decision making authority with them. A simple repayment of funds would not end the relationship.

On the matter of debt, would you need a loan or would a line of credit suffice? A line of credit is a limit set by the bank for a term during which you may withdraw funds for a variety of reasons. Once you repay the amount withdrawn you may go back for another withdrawal. Credit lines work better for short term purposes like making payroll.

Loans are of larger amounts and span over a longer time line. These are generally used to generate further income for the burrower. Lenders issue the funds for a specific purpose and they want to know how the funds would be used.

This sets the stage for the next stage of this article. What are questions will face and why so?

How to prepare for a conversation with a banker

Banks loans are the most popular source for business funding. When issuing a loan, the banker would want to cover three bases. Those are risk, use of proceeds and business model.

The banker always considers the risk that the borrower would not repay the loan. The second is what you are going to do with the loan. Will it be used for lawful purposes, in a predictable manner that makes business sense? The third question is whether your business has the capability of putting the funds to good use? Will the funds result in a business model that delivers financial returns?

Factors that affect the risk assessment vary from project to project. Here are some questions you may face. Has business model been tested? Do you and your leadership team have relevant experience? Is your business in a financially stable industry?

Okay, those are the bases that the bank covers. What are the three bases for you? Those are homework, information content and format. Let us cover these one at a time.

Do your homework

You are the expert in running your business. If you are not, your first task is to be one. You know how your business runs, what you need the funds for and what you will do with it. Let those be your guiding principles. Do not fall for a “loan package” that is good window dressing but falls apart on scrutiny.
Your bankers will find questions not already answered in the information provided. That is when your homework will be invaluable. Your lender needs to know that above all you know what you are doing. And trust you to make good decisions that will help your business.

Provide complete information

You serve your cause best by providing exhaustive information, and then some. You need not provide information that is not relevant but include everything that is. Now, “relevance” is a relative term. You may provide enough in the context of business operations and future projections. But that may not be adequate in the context of risk management.

The problem is you do not know what you do not know. A good framework will help in compiling the information required. A good business plan template may provide you with a reasonably safe guideline.

The last item we would like to include here is to remind you to be mindful of unforeseen contingencies. Remember, anything that can go wrong has a high likelihood of going wrong. Bankers love to see that you have built in buffers to absorb the deviations from plan. The contingency needs to be comparable to the risk.

Be mindful of your presentation

How you present your information may clarify or confuse the cause. The human mind can handle only so much at a time. Create a good logical structure and explain the structure upfront. Then follow the structure diligently.

Do not cram all information into each component of your structure. Consider including details in an appendix with clear cross references. You do not know whether the reviewers prefer visual or verbal cues. So provide both. Include charts and figures that explain the story.

Avoid the need for the lender to plow through a lot of details before the big reveal. Start with the summary. Or, as the popular TED Talk goes, “Start with Why.” Your lenders are people and they need to feel that the project is a great opportunity.

Approach the right Lender with the right expectations

Loans are how banks make money. And that makes the borrowers customers. But does not mean that the banks will be happy to give you the loan if you have some assets or a business plan to back it up. The fact that businesses need external funding means that such resources are scarce.

We have been talking about lenders and banks as if they are all the same. Banking is an industry that has all types of banks. We know difference between the local community bank and the larger national bank. But even within those categories each bank has its own appetite.

Each bank prefers certain industries or type of loans it issues. Each has it own collateral requirements and policies on credit scores. They also have targets for loan categories. Your loan application needs to match what the bank is hungry for in that financial quarter.

How Obligent can help

If you are reading this we hope that the reason is beyond academic curiosity. Are you hesitant in putting together a growth plan because you know that you do not have funds to spare now? Or have you crossed that hurdle and the growth plan asks for funds that gave you a sticker shock?

Or are you shopping for a loan and was expecting a more concrete checklist? Whatever be the case, get in touch and Obligent may be able to oblige!