Opinion: Lenders come in all forms, so make the right choice
For small or medium-sized businesses, finding timely operating capital to keep the business moving forward can be extremely challenging. It is imperative for companies to understand that every lender or source of capital has a different cost, return expectation, level of underwriting and timing to close.
As they say, you need to “know your audience.”
Traditional banks are always a viable option for financing, but they may not be well-suited for emerging businesses or businesses crunched for time. In the post-recession marketplace, many large banks operate within confining lending boxes and become factories of financing for simple, repeatable structures of lending. Federal lending regulations and expectations of large reserves dictate how much large banks will lend and who qualifies to borrow. If your business doesn’t fit the box, you may not find the solution you hope for.
Community banks tend to be a bit more flexible with lending and also provide a more hands-on approach to oversee the entire process. As a result of being more involved in the process and oftentimes some additional support from the SBA, community banks can prove to be a solid source of capital for small businesses and definitely worthy of consideration.
For those businesses with larger or more complex capital needs or those needing a different approach due to either structure or timing, many businesses are turning to private capital as an alternative resource. Unhampered by the regulatory oversight faced by many banks, private lenders can often make investment decisions using more flexible criteria.
To go this route, one challenge can be telling your story — articulating what your business is, its value, your business plan and the need for capital to support these efforts.
Lenders are basically renting you money. Their concern is primarily the return of their money before the return on their money. You need to have a thorough picture of how and why you are a good risk for them — how you are going to mitigate risk and ensure they get their money back.
You must get clear on what you need and why. How much capital are you looking for? Why? What is the direct effect on your business as a result of this capital coming in? What type of security or collateral do you intend to offer? And, how and when will you be able to return the capital?
It is perfectly acceptable to work with an adviser, accountant or someone else to ensure that your documents are telling the story you want to tell. Think like a Boy Scout — “always be prepared.”
So much of the frustration in dealing with the lending process is the sheer time it takes to actually get something done. This process can take anywhere from a few weeks to a few months. Each lender regardless of its makeup has its own way of doing things.
The rule that I have found that has proved successful is to run down parallel paths simultaneously. Having several conversations going at once will allow you to not only meet more people and get different perspectives, but also allows you to hedge your bets and not be married to a single outcome.
If your business is thriving or on the cusp of great things, you may be a loan away from taking the next big leap forward. Funding is best approached as a process: Identify the right lender, ask the key questions, tell your story with passion and pack your patience.