Financing process gets tougher

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Kenneth Dewitt is a CPA and certified financial planner who serves as a part-time chief financial officer for a variety of businesses, including trucking companies.
E-mail [email protected].

Are you ready to expand your fleet or refinance your debt? You had better be prepared to write a financing proposal. For loans of any considerable size, lenders increasingly require a formal written proposal before they will consider a loan.

According to the New Hampshire Commercial Finance Group, the vast majority of all business-financing proposals are eventually turned down. Key reasons for decline include (1) inadequate cash flow, collateral or security and (2) proposing financing that is not compatible with a reasonable assessment of risk. But another major reason is a submission that is either unprofessional or not insufficient.

Thus, NHCG argues, most business owners step up to the plate with at least two strikes against them. They are unaware of and unprepared for the standards they will be expected to meet in order to obtain financing. So what are the steps to preparing a successful proposal?

Take your time. The financing process may take several months. The more you understand what your lender is seeking and what is mutually beneficial, the better your position will be. Internally, your chief financial officer should lead the process. If he needs help, don’t hesitate to seek it from your CPA or financial consultant. Don’t be penny-wise and pound-foolish.

Do your homework. Bankers and lenders ordinarily apply the “Five C’s of Credit” – character, capacity, capital, condition and collateral. Your proposal must cover these in detail. Plus, your prospective lender will compute various financial ratios on your financial results – up to five years worth – and project future results.

A full written business plan demonstrating your management expertise and knowledge will go a long way toward helping your lender understand and deal with the risks. Know the various types of financing and the typical lending limits.

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Test the waters. Most seasoned financial executives test the waters with a potential lender through a limited proposal or inquiry of the lender’s level of interest. Through this you can determine exactly what the lender wants in his proposal and which lenders are most interested in your deal.

Tailor a custom-made proposal. Lenders can immediately recognize a “one-size fits all” proposal that is being shopped all over town. And, through credit reporting services, they will know whom else you’re courting. It’s better to spend the time and effort to customize the proposal for this specific lender, based on what you have learned in advance.

Beware of deal killers. For a lender, making a loan is like completing a jigsaw puzzle – it’s maddening to not have all of the pieces fit together. Make sure yours do. Common deal killers include slow response time on information requests, failure to explain how your financing will help your business and improve your financial condition over time, overstating collateral values or failing to list both fair market and liquidation values. Others are financial statements that cannot be reconciled to income tax returns or to your projections, or that don’t comply with generally accepted accounting principles. Undisclosed liens or material omissions of important facts, like a pending lawsuit or regulatory matter, can kill your lender’s confidence in you.

Read the documents. Lenders spend weeks analyzing numbers and conducting due diligence before deciding loan parameters and drawing up documents. Why would you spend just five minutes scanning the documents before you sign them? Loan documents contain risky agreements called restrictive covenants and personal guarantees. Let lenders know up front that you will be expecting sufficient time and a complete set of loan documents a day or two before loan closing.

Loan proposals prepared in a diligent manner have a better chance of approval. Don’t go to the plate with two strikes against you. Learn to trouble-shoot your financing proposal before its too late.

New Hampshire Commercial Finance Group’s online “Business Financing Guide” is available at this site.