Your goal is to secure financing. Your prospective lender's goal is to
understand your company's financial and non-financial aspects so well that
he or she becomes comfortable with giving you money. Therefore, to best meet
your need for capital, you should try addressing the needs of the lender
first.
One of the first things any business owner should know about seeking
capital is that lenders have a limited amount of time to review a loan
request and make a decision. As it is impossible for a lender to know every
industry, your first priority should be to help him or her understand the
industry in which your business operates. This will help your prospective
lender become more comfortable with your company and will improve your
chances in securing the loan your company needs.
Specifically, you'll want to discuss a number of factors that influence a
business in your industry, including driving forces, risks, and how you
mitigate risks.
- Talk about key driving forces in your industry.
When a lender reviews a loan request from a company in an unfamiliar
industry, a lack of industry knowledge can make the lender skeptical and
cautious about granting the loan. Therefore, it's beneficial to you to talk
about your industry's most important issues, which may include, but are not
limited to, so-called macroeconomic issues (labor, regulations, impact of
changing interest rates, consumer spending, fluctuations in currency),
cyclicality, seasonality, suppliers or buyers, entry or exit costs,
technology, competition, and international considerations (if applicable).
If your business operates and services customers on a local or regional
level, focus on explaining to the lender the industry environment in your
company's immediate market area. Do not lose points on something as simple
as not sharing with your prospective loan officer information about your
industry.
- Explain what risks your business faces in the
industry.
Each lending institution, whether it is a bank or a financing company,
avoids extending loans to those customers who operate in risky industries.
Larger financial institutions have lists of industries that are called
prohibited industries (they cannot lend to companies in those industries
under any circumstances; impacts only small number of businesses) and
non-preferred industries (they do not lend unless there is something special
about that company or loan request). Smaller community banks are less formal
and are simply cautious about lending to certain industries, which commonly
include restaurants, construction contracts, and high-tech companies. For
instance, industry risks for a restaurant in an urban area such as Boston
may include very high competition, discerning and demanding customers,
rising costs of produce and alcohol, lack of quality waiting staff, and
threat of losing your star chef to competitors.
As each company faces industry risks, regardless if those are
lender-perceived or actual threats to your company, your next step is to
make lenders comfortable with those risks.
- Demonstrate what actions you have taken to mitigate industry
risks.
When you disclose an industry risk or anything that may be perceived as a
risk, you must provide an explanation of how you have been able to mitigate
or eliminate the risk. This is the key to giving a lender confidence. It
shows that you know what you are doing and are prepared to address and face
the risks during the period of loan repayment.
For instance, an appliance retailer may mitigate industry risks by
maintaining a good reputation in an area and an established customer base,
demonstrating an ability to maintain low costs of inventory by purchasing
through a cooperative arrangement, offering a wide selection of appliances,
exercising aggressive collection practices, and performing excellent
customer service. The list of mitigating factors can include your business's
existing experience in dealing with some of your industry's challenges; the
actions management is currently taking to address certain industry risks; or
a game plan management has developed to curb industry threats.
In short, a lender wants you to know your industry--and know it well. It
sounds simple, but I have worked with many borrowers who neglected to
realize and face their industry issues-- and ultimately this neglect hurt
their businesses. If you follow these rather simple suggestions, you will
make a lender's job easier, will earn his or her respect, and will lay a
foundation for your future loan relationship.
