Neil’s column regularly appears in the Good News Network.
Your goal is to secure financing. Your prospective lender’s goal is to understand your company’s dynamics and cash flow so well that he or she becomes comfortable with lending you money. Therefore, to best meet your need for capital, you should try addressing the needs of the lender first.
The most important thing to know about seeking capital is that lenders have a limited amount of time to review a loan request. It is not possible for a lender to be familiar with every industry, so your first priority should be to help them understand the industry in which your business operates. This will make them more comfortable with your company, less skeptical and cautious, and will improve your chances of 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.
1. Talk about key driving forces in your industry.
Describe your industry’s most important issues, which may include (but are not limited to) 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 your company services customers on a local or regional level, focus on explaining the business environment in your immediate market area and recent trends.
2. Explain what risks your business faces in the industry.
Large financial institutions have lists of industries that are called prohibited industries, within which they are not allowed to lend under any circumstances. Only a small number of businesses are affected. In addition, many institutions have identified so-called non-preferred or high risk industries. Loan requests from companies in non-preferred industries are scrutinized and granted only on a case-by-case basis.
Smaller community banks are less formal and are only cautious about lending to certain industries, which commonly include restaurants, construction contractors, gas stations, 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 risk of losing your star chef to competitors.
Ask your prospective lender whether his or her financial institution lends to companies in your industry or views it as higher risk. 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.
3. Demonstrate what actions you are taking to mitigate industry risks.
When you disclose an industry risk or anything that may be perceived as a risk, you must explain what you are doing to mitigate or eliminate the risk. This is the key to inspiring confidence in a lender. 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 might mitigate industry risks by: 1) Maintaining a good reputation locally, growing a loyal customer base, and performing excellent customer service. 2) Demonstrating an ability to maintain low costs of inventory by purchasing through a cooperative arrangement. 3) Offering a wide selection of appliances, and 4) Exercising aggressive collection practices. The list of mitigating factors can include your business’s existing experience in dealing with industry challenges; the actions management is currently taking to address industry risks; or a game plan management has developed to curb industry threats in the future.
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 recognize or address their industry issues — and ultimately this neglect hurts their business — and their loan chances. If you follow these suggestions, you will make a lender’s job easier, while earning his or her respect, and laying the foundation for a mutually beneficial loan relationship.
Look for the next installment of Neil’s column on the Business Page of the Good News Network, where we team up to help you and your company reach the next step toward your financial goals.