by John Qua
for the Business Journal
If you foresee a financing need in 1999, you should be looking for the right lender now. Raising capital can be one of the biggest challenges facing a growing business. Taking time to structure a flexible loan can improve the chance that your financing arrangement will ultimately achieve the goal you have in mind.
What lenders look for. Business owners need to think more like the lending institutions with which they are working. For example, too many business owners may manage down income to avoid a heavy tax burden, while a lender looks at net income and true profitability.
An understanding of what loan officers look for can help you put your business in the best possible shape to secure financing. While each lending institution has specific criteria that reflect its lending portfolio and experience, certain aspects of a business are of interest to most lenders.
?Years in business. Most lenders prefer to provide financing to established companies in business for at least five years, with at least two or three years of profitable operations.
?Operating trends. The historical operating performance of a company is a key factor in any credit decision. Lenders look for stable, upward trends in revenues, earnings and cash flow. Dramatic increases, as well as deteriorating or erratic trends, may raise questions. They prefer audited or reviewed financial statements with footnotes as opposed to tax returns.
?Balance sheet strength. Lenders look for strong equity. They will compare your company's assets-to-liabilities ratio and your profit levels to those of your competitors.
?Ability to repay. Lenders must feel confident that a borrower can service the proposed debt and maintain business operations with current cash flow. For short-term loans, this is a top priority. Prepare a five-year projection with balance sheets, income statements and cash flow statements for potential lenders.
?Collateral. Short-term loans typically are secured by accounts receivable and inventory, while longer term financing typically is secured by equipment or other long-term assets. The amount of credit extended compared to the value of the collateral, which is called the loan-to-value ratio, varies with the transaction, the collateral type and the lending institution.
?Your credit history. Significant weight is placed on the company's record in servicing its credit obligations. If your company is privately held, lenders will also review the personal credit histories of its principal owners.
Check your business and personal credit reports now; correct any mistakes and resolve any outstanding problems. If you have no business credit history, build one: Borrow small amounts when your cash flow is positive and pay the money back before it's due.
?Business operation and character. Lenders look for well-run companies with experienced management, competent and loyal employees, adequate business insurance and a good reputation within the market and community. Start collecting press clippings, awards or other evidence pointing to your company's success or good will, and status as a good employer.
?Industry. Lenders can be averse to lending to companies in certain industries. This may reflect negative
experiences, or it may be the result of regulatory pressures on banking institutions to maintain diverse portfolios. In some cases, bank consolidation may change a bank's lending appetite. Non-bank commercial lenders may be more flexible.
?Revenue sources. Lenders like to know who your customers are and will want to see a customer backlog report showing locked-in customer contracts. If you have few clients or a heavy customer concentration, try to diversify your customer list or have a plan in place to do so.
?Y2K compliance. Lenders today want their clients to have the software systems in place to deal with the year 2000 computer problem.
Make sure your computer system is Y2K compliant or that you have plans to assure timely compliance. Know how your own customers are dealing with this issue if they aren't prepared, it could have a snowball effect on you.
Make an effective presentation. Once you are ready to apply for a loan, the presentation you prepare for potential lenders is crucial. It should be formal, complete and clear. Begin with an effective executive summary to establish your goals and credentials, and capture the interest of the lender.
Have your financial statements prepared by an external certified public accountant for added credibility.
Brochures and other marketing material will also help lenders understand your business better, and the better they understand your business, the better chance of having a loan approved. Begin working on corporate marketing materials now.
Look for the right lender. Just as a lender wants to be certain of lending to the right company, you want to borrow from the right lender. Start by inviting lenders to visit your facility and meet your key management team.
Potential lenders can gain a better understanding of your financial needs during an onsite visit, and meeting your management team will let him or her know that you have a capable group in place to run the business should the need ever arise.
In addition, this gives you a great opportunity to interview several lenders and compare the financing they have to offer you.
The lender you choose should be committed to your industry and have the flexibility to adapt its terms to your business' individual circumstances.
Although you may be looking for financing to meet a need that is months away, be sure to discuss your plans with potential lenders. You may spend less time applying for credit and have funds more quickly and easily available if you think of raising capital as an ongoing process and start planning for longer-term needs today.
(John Qua is senior vice president and director of business financial services for Merrill Lynch.)
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