WHY IS COMMERCIAL FINANCING SUCH A GRIND?

Summary

• Financing requests are often unprepared leading to back-and-forth with lender.
• A fulsome yet easy-to-navigate financing package can simplify process.
• Financing package should consist of all critical financial documents as well as deal summary outlining both the business and request.
• Lenders are busy with several customers and new business requests competing for their attention. Successful financing requests simplify lender's life.
• Credible broker can help if you lack time or expertise (#ShamelessPlug).

WHY IS COMMERCIAL FINANCING SUCH A GRIND?

You, the business owner, approach a commercial lender for financing. They ask for historical financial statements, accounts receivable listings, accounts payable listings, and maybe a Personal Net Worth Statement (ugh, personal guarantees).

You deliver the requested information with zero context.

Time passes.

Lender: I see gross margins are down twenty percentage points year-over-year. Can you explain?

Business: You explain.

Time passes.

Lender: I see significant shareholder loan repayments. Can you explain?

Business: You explain.

More time passes.

Lender: I notice customer concentration. They are also late payers. Can you explain?

Business: You explain.

More time passes.

Lender: Your credit bureau has a credit card delinquency. Can you explain?

Business: You explain.

How frustrating. And this is now a distraction from the business. Maybe you finally receive a term sheet. It's an uncommitted discussion paper. The lender still needs to go and get credit approval. In some cases, they decline your request and it was all for nothing.

WHY DOES THIS HAPPEN?

The back and forth is soul-crushing, but advanced preparation would have helped.

Lenders are busy. Mid-market account managers may have 30+ customers. Plus new business opportunities. All competing for their attention. Each time they go back to you on an item, they'll likely move on to the next thing in the queue while they await your response. Consider how unproductive you are if you're constantly interrupted.

And the account manager still needs to advocate for each request with a credit manager before issuing a term sheet. And the credit manager has their own task list. And you're just trying to get a term sheet. Formal credit approval is another step entirely.?

You, the business, complicate the process by not presenting an easy-to-navigate financing package. Ideally, include a summary of the business and financing request. And anticipate questions and respond to them ahead of time. You won’t anticipate every question, which is fine.?Don't fall into analysis paralysis.

A financing package enables the lender to work through the request while minimizing that dreaded back-and-forth. Another advantage: A financing package can be used across multiple lenders if you wish. Depending on the magnitude of the request, consider shopping it.

YOU'VE ALREADY SUBMITTED WITHOUT A FINANCING PACKAGE. WHAT TO DO NOW?

Once you’ve initiated a review with a lender, it may be too late to do anything. If the process was frustrating but successful, lick your wounds and move on.

If your request was declined, your opportunity with that lender may be gone for now. You’ll need to re-gather and decide who else to approach.

If declined, you'll need to understand why.

1. Did you catch the lender at the wrong time?
2. Did you not sufficiently communicate the request?
3. Is there a structural issue that can be resolved?
4. Did you approach the wrong type of lender?
5. Or is it simply not a debt deal?

Depending on the situation, you may wish to engage a broker (#ShamelessPlug). Their job is to prepare a financing package and communicate the business/financing in a way that lenders can easily digest. They also know which lenders to go to for which situations. Banks, credit unions, and private lenders all have a time and place. If it’s simply not a debt deal, the broker should be able to point that out before taking on the engagement. Alternatively, they may be able to recommend structural changes to improve the ask.

WHAT DOES A GOOD FINANCING PACKAGE LOOK LIKE?

“Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.” - Abraham Lincoln, former president of the United States

A good financing package is fulsome, yet easy to navigate. It includes everything you expect is important, and nothing more. If you’re not sure, here is an example of a basic financing package.

LUCK FAVORS THE PREPARED

“By failing to prepare, you are preparing to fail.” - Benjamin Franklin

If you're going to do something well, preparation is critical. But sometimes we need to acknowledge our strengths and weaknesses. There are countless things to do in a day, but only 24 hours. 16 hours if you’re a responsible sleeper. 12-14 hours if you have kids you spend time with. <12 hours if you have a life outside of the business. You get the idea.

This doesn’t only apply to commercial financing. I don’t register for a jiu-jitsu competition without training. Business owners don’t typically start a business plan without at least some advanced planning.?

But if you lack the time or capacity, then consider outsourcing. It’s impossible to outsource preparation for a martial arts competition. But I outsource plenty of other things.

I have a young family, am building a business, and have interests outside of work. They’re all time-sucks. And since I recognize how limited my time is, I outsource. I don’t do my own taxes or bookkeeping. I don’t mow my lawn. I don’t pick up my groceries. I don’t even take down (or put up) my own Christmas lights.

I ask for help and leverage other people’s time and expertise. The same rules apply to commercial financing. A credible broker can fill a temporary void (#AnotherShamelessPlug).?

CONCLUSION

Each financing request competes for a lender’s time. An account manager may have 30+ customer relationships with competing requests.?

A successful financing request simplifies the lender's life. That means presenting the request on a platter: Delivering all relevant information, detailing the request, highlighting issues and anticipating questions. And include a deal summary or?Offering Memorandum.

Many account managers work across a variety of industries. And so they likely don’t understand your business nearly as well as you do. Explain what the business does, the customers and the suppliers you work with. Clarify your value proposition and contrast it to competitors. But do so in basic language.

Some businesses don't require much explanation. Investment properties, for example.

But others require more info. A pumpjack maintenance company, for example. I’ve never been up close to a pump jack. Who are the customers? Are contracts in place? Is the land owned/leased? Who are the competitors? What is the company’s competitive advantage? Is labour specialized? Any liability considerations? What else don’t I know?

If there are multiple requests to balance, a lender will naturally gravitate to the easiest one to complete. The least frustrating requests move the fastest. And it's usually an indication of what that customer is like to work with going forward.