Lenders and entrepreneurs have different perspectives and different interests. These differences are ingrained, but good financial times can create a comfort level that obscures them. Now in times of tighter credit and a slower economy, these different interests are thrown into sharp relief.
Entrepreneurs in particular find themselves at a disadvantage. They need capital to operate and grow their businesses and they must approach lenders to obtain it. At the same time, the financial sector is more prudent than it has been in the past, as financial performance depends on limiting loan losses. The result is “by-the-book” policies that are frustrating for entrepreneurs.
It’s important for entrepreneurs to understand the lenders current mindset. What are lenders looking for? What do they need to see from a client, especially when their business is under pressure in difficult economic conditions?
In the eyes of lenders
- Lenders look to see if the business model is broken. Have market shifts made a company’s advantage obsolete? Can innovation save it?
- Lenders look to see if management has a plan. The absence of a plan speaks volumes, but the nature of the plan sends a message as well. Is it merely a survival strategy, or is it a longer-term vision that positions the company for the eventual economic recovery? This often distinguishes well-managed companies from poorly managed companies, in the eyes of lenders.
- Lenders look to see how committed management seems to be. When ownership and management are not the same, then how are they working together? Is ownership ready to man the battle stations or jump ship? Lenders are completely dependent on the managers of their client companies. In this economic climate, they are spending more time making sure they understand what kind of manager you are and what potential you have given your business. This may appear to indicate a lack of trust on their part, or even inefficiency or procrastination, but for them the level of comfort they feel about a business relationship is essential to making decisions.
Help your lender help you
Knowing what your lender is thinking is only useful if it gets you what you need – access to capital. That’s why it’s important to put the shoe on the other foot and look at the things you should do before and during your approach to a lender. Here’s how you can help your lender help you.
- Plan well in advance if you need financing. Lenders are more cautious these days and less inclined to take shortcuts on their due diligence checks. Turnaround times are slow, so plan for this and set your expectations accordingly.
- Prepare to be more forthcoming than you have ever been, as lenders want more information than before. You may not understand why, but there are always reasons.
- Firm up your business plan. The more time a lender has to spend straightening out a client’s business plan, the less confidence he or she will have in that client’s ability as a manager. This is not a good time to make a bad impression
- Retain a financing specialist to assist you in the process. They know how to package information to a lender in order to approve the odds of success. Like writing a test in school, you score much better when you have the answers in advance.