Carefully define your Business when seeking Financing

One of the fundamental elements of the lender's review of a business loan request is the evaluation of the industry in which the business operates. There are many inherent characteristics of various business categories that create risks for lenders. Oftentimes lenders will altogether avoid loans to certain industries simply because the risks are perceived to be beyond what the lender is willing to accept.

Before seeking financing, therefore, the small business owner should take the time to understand how his or her operation will be viewed as an industry from the lender's perspective. For instance, a lender may feel considerably more comfortable funding a convenience store that sells gasoline than financing an oil exploration company. Although both of these businesses technically operate in the same industry, the risks associated with each are dramatically different from the other.

Positioning the business in a more positive category within its industry can help the borrower by raising the lender's perception and increasing the attractiveness of the transaction. As a simplified example, instead of describing his or her company as, say, just a hamburger stand, the borrower should attempt to broaden the illustration by defining the business as a food service provider. This loftier characterization can effectively communicate the actual flexibility of a business that consists of a grill and a kitchen and has regular patrons that purchase food there. As a food service provider, the borrower makes it known that the business has the maneuverability to modify its strategy and product offerings according to unforeseen changes in the economy. In other words, the borrower is stating that the business can switch from hamburgers to chicken or egg salad sandwiches if necessary to follow current trends in dining preferences.

Knowing how lenders perceive and evaluate the borrower's industry and business can assist in planning the approach that will be necessary to obtain the desired funding. The borrower should consider the answers to some pertinent questions from the lender's point of view, such as, where is the business within the life cycle of its industry? Is it beyond its financial peak (by still manufacturing buggy whips), or is the business still too new to be an acceptable risk (such as building hydrogen-powered cars). Furthermore, how will the business take advantage of its position and opportunity? (Prudence dictates that lenders prefer to finance industries while they continue to have a strong growth potential for the products or services that they provide, before they reach their marketing peaks.) This type of preparation will help the borrower to define the risks that the lender must address. Furthermore, the borrower should also develop a strategy to reduce those risks facing the lender. If these concepts are incorporated into the loan application, the loan will necessarily be easier for the lender to approve.

Additionally, lenders will be wary of a business that attempts to serve too many specialized markets from a limited operating base. For example, a dry cleaner/car wash/convenience store/hairdresser with a Happy Hour represents a unique business plan – but one that's likely destined to fail. It would be virtually impossible for such an operation to have an adequate focus, effective marketing, or sufficient profits. It must be remembered that the business should be defined in specific terms so that the lender can clearly understand what it is that the borrower is trying to accomplish.

blog comments powered by Disqus