Business Financing
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Business Financing
Application Strategy

When applying for business financing, its important to have some sort of application strategy to improve your chances of success.  A lack of strategy can cost you time, money, and funding.

So what do I mean by a financing application strategy?

This is an approach you take to create a result that you’re prepared to accept.

The business financing process has a number of do’s and don’ts that you need to maneuver through and around to increase your probability of success.  And as you go through the process of seeking business capital, you may need to continually adjust your course of action which is where the strategy part comes in to play.

Application Strategy can be broken down into three parts ... 1) How to Apply, 2) When To Apply, and 3) Where to Apply. 

Let’s briefly take a look at each one of these.

How To Apply.

In addition to how to put together and properly describe your business financing request, which I will go over in other sections, the “How To Apply” aspect of financing strategy relates to how to convey your information to potentially interested lenders.

For instance, if at all possible, I try to never submit an application package to more than one financing company at a time.  Why?  There are several reasons.  First, an individual financing company will go through your application package and issue an approval, request additional information, or decline your request.  Whatever they issue back to you is a source of valuable information to the overall process.  If you get approved, then is the approval acceptable to you?  If not, why?  Are there areas of negotiation with the lender that could be available?  If more information is required, what is the information requested and why is it required?  Does an information request provide indications as to where your application package is deficient or where the decision-making process may be leading?  If you are issued a decline, what is the specific reason for the “No, we’re not interested” decision.

If the first lender you apply to gives you what you want, then the process is complete.  But if that’s not the case, there is much to potentially be learned from feedback you receive from an application submission that can be highly valuable if you need to move on to another source of business financing.  

From my experience, it is rarely a good idea to send multiple applications for financing out at the same time to multiple financing sources.  I can understand that a business owner or manager wants to get the best deal available in the market, so having something to compare and contrast is helpful in determining the best available deal.  Plus, in many cases, time is of the essence, so multiple applications are viewed to be a way to speeding up the process.

But remember that multiple applications going out at the same time 1) limits your ability to adjust to feedback received from any of the financing companies that received your application, 2) increases the potential for your application to be constrained through multiple submissions to the same lender, and 3) can negatively impact your personal and business credit both from a credit scoring perspective, and a lender interest perspective.

Let’s look more closely at each of these.

When you only apply to one financing company at a time, you have the ability to enhance your application package based on the feedback received.  In many cases information deficiencies or oversights can lead to declines or suboptimal terms.  And once an underwriter or credit officer makes a decision, it’s difficult to get them to change their mind even after providing greater support information or a more complete explanation of previously submitted information. If your application is sent out to multiple lenders at the same time, you lose the ability to adjust to lender feedback when making additional submissions if additional submissions are necessary.

Yes, this “one at a time” approach takes longer to complete.  But it can also be the difference between getting approved and getting declined or getting approved with optimal versus sub optimal terms.

In the haste to get business financing in place, a business owner or manager may decide to take a multi-pronged approach and 1) apply for business financing themselves, plus 2) utilize a consultant or their accountant or their lawyer, plus 3) utilize one or more brokers.

Typically this type of approach is a bad idea for several reasons.  First, your application request can cross paths and end up at the same lender from multiple submitters.  For some lenders, this can lead to an automatic decline, especially if the request has a reasonable degree of complexity to it as many finance companies don’t want to waste their limited resources trying to understand a file if several other lenders are trying to do the same thing.  

Second, there are also finance companies that will accept applications from multiple sources on the same deal and issue dual approvals.  At that point, all the brokers and consultants that receive the same approval for your submission start fighting over the deal which can put you in a more precarious position attempting to manage all individuals that are trying to get paid for their efforts.

Third, every time you make a submission, your credit gets accessed, which can lower your credit score, and your credit history will also show who made inquiries.  This is visible to all lenders that receive your application package.  When some lenders see numerous recent inquiries, they immediately decline the application as they’re not prepared to go through a file that is being broadly shopped around as they can view the odds of success for them securing the deal to be very low and not worth the effort.

In most cases, a multi-pronged strategy is not a good idea for all the reasons mentioned above and is not recommended for the “How to Apply” aspect of a business financing application.

Another consideration for “How To Apply” is to first apply to a financing company that you think can provide you with the best terms possible, with funding requirements you can meet, and in the timeline you need to work within.  There may be several financing companies in this category, but many times, they will all assess deals similarly.  So, if you get declined, or the terms and conditions are no way acceptable to you, then instead of applying to another very similar lender, you may want to consider moving into a different lender category that will view your request and financial situation more favorably.  This might not lead to an optimal outcome, but it may provide for the best outcome available to you at the point in time you require the financing, and the second application also has the opportunity to benefit from the lender feedback received during their processing of your first financing application.

In order to take advantage of this type of approach, you’re going to need to have a pretty good working understanding of the overall market place, or be working with someone that has that knowledge.


When To Apply

The obvious answer would seem to be … when financing is required.  But that’s not always the case.  Ideally, you should apply for business financing when your Credit and Financial Profiles are the strongest or strong enough to secure the financing required.

For simple financing requests, you should typically apply whenever you need business capital. But for larger and/or more complex capital requests, when you apply can matter.

Let’s go over some examples of how the “when” can impact the process.

Financial Statement Freshness.  Financing companies rely on financial statements when assessing a request for business financing.  Accountant prepared financial statements of your last completed fiscal period provide the best available view of your company from an underwriter’s perspective.  The sooner the accountant prepared year end financials are available to you, the sooner you are able to provide them as part of your business financing request package.  In Canada, corporations are required to file year end corporate tax returns 6 months after the year end.   So if you stick to that schedule, your financials are already 6 months old when they become available. 

For many businesses, that is as fresh as the results get.  This is also why it can be beneficial to get your year end completed sooner after the fiscal year end because you’re improving the freshness of the financial statements which provides greater comfort to a financing company that the accountant prepared financial statements are a good representative of the current financial health of the business.

The further you get away from your last completed year end, the longer the period of time a financing company will have to rely on internally generated interim financial statements, which are less reliable to third parties, especially when they aren’t reviewed and prepared by your arm’s length accountant.

For larger, more complex financing requests, it’s not unusual for a financing company to review your business financing request, state their serious interest in providing financing to you, but then put your request on hold until you can provide accountant prepared financial statements that are no more than 6 months old and are “fresher” than what you’ve already provided to them.

Measurable Results.  In situations of expansion and/or diversification where business capital is required for a new line of business, or a substantial change in business operations, measurable results that support the capital request can be extremely helpful to the financing process.  This typically comes from some form of a smaller scale, or phase I completion of your expansion/diversification plans that shows the business has worked through all the necessary moving parts required to generate incremental cashflow capable of providing an acceptable return and to debt service the requested capital.

In many situations business financing is required for an expansion to create a size and scale that can makes sense on paper and can be supported by research, competitor success, and third-party expertise, but can’t yet be supported by internally measured financial performance.  In this situation, the business financing  available to you may be more expensive due to the risk assessment of starting something new, or going in a new direction.  In general terms, business financing is much easier to secure when working with tangible historical performance versus theoretical projections. 

Debt financing companies will assess the risk of potential loss to themselves much higher when something new is being undertaken by an enterprise as compared with a predictable expansion based on verifiable, measured results.

So possession of sufficient proof of performance is a key determinant of when to apply for business financing. 

Removal Of Derogatory Events.  Derogatory events represent things that have happened in the business which have created a negative impact and have the potential to further impact the business going forward either directly through negative financial impact, or indirectly as a reflection of how a business is being managed.

The main derogatory events stem from Credit and/or Legal issues.

Credit issues include collection activities, registered judgements, bankruptcy, debt repayment proposal, late payment history, payment defaults, and high utilization of credit. When one or more of these issues become present in the public record of a business or business principal, its important that the item is both resolved (or a clear, predictable, and well documented resolution process is underway) and properly explained.  Through the annual business cycle and years of operation, its not uncommon for Credit issues to periodically occur.  Lenders recognize this and can be understanding of these types of issues occurring provided that they 1) clearly understand what happened, and 2) are provided with third party evidence that the matter has been resolved.

Legal and Credit issues overlap in many cases.  In the context of this discussion, Legal issues represent ongoing disputes that have not been resolved, but need to be disclosed to properly represent the financial health and financial risks of the business.  Once again, if you can show a lender the financial magnitude of a legal issue as well as the path to resolution, they are more likely to work with you than decline your request because of it.

Therefore, “When To Apply” should take place when there are no derogatory events, or when derogatory events can be properly explained, quantified, and dealt with in a responsible manner. 

If you have a derogatory event attached to you or your business that shows up in the public record, and you don’t disclose it and/or haven’t addressed it, the event can lead to an application for business financing getting declined.  

If you have a derogatory event that is not listed in the public record, or in your accountant prepared financial statements, nondisclosure may not impact you ability to access capital in the short term, but if the issue has a significant financial impact over time, or becomes a public record disclosure, you could end up in breach of your financing conditions for nondisclosure and cause the finance company to take action towards terminating their relationship with you and getting their money back.

Time of Year.  This is likely one of the hardest items to gauge, but potentially relevant non the less.  Financial institutions are also businesses and have their own annual operating cycle, budgetary targets, and fiscal reporting requirements.  Business financing portfolios are risk rated and financing company management promotions and bonuses are driven by financial results, similar to a lot of businesses.

At the beginning of a lender’s fiscal year, they are typically more conservative when making business financing decisions to see what their deal flow looks like as the year progresses and to see if they can achieve their lending goals without aggressively applying their lending criteria.  Once the first quarter results are in, they will become more or less aggressive based on what’s going on with their lending portfolio and fiscal performance to date.

The same is true throughout the year and is even more of an emphasis in the last quarter when final year end results will lead to promotions/demotions and bonuses. 

While there is no way to know exactly what is going on in any particular lending organization from the outside looking in, general economic indicators and reports can provide significant insight as to what you can expect when applying for business financing at a particular point in time.

For instance, debt financing companies, regardless of who they are, price their products based on financial market indicators whether that be the prime rate, the 5 year bond rate, the 10 year bond rate, etc.  Further, economic indicators such as the inflation rate and GDP also provide insight into how lender’s are reacting to 1) rising or falling inflation, 2) lower or high GDP numbers, 3) bankruptcy trends, and so on.

Through tracking the movement in the key publicly available financial and economic indicators, you can  develop a reasonably accurate opinion of what’s going in the business financing market and apply that to your capital acquisition planning process.  The further you can plan out your business financing needs, the better you’re going to be able to determine not only when to apply for financing, but who to apply to at a given point in time.

Where to Apply

When applying for business financing, you’re going to be providing a formal request to one or more financing companies.  So part of your financing strategy is to determine who to apply to, for the financing you require, at a given point in time.

I keep coming back to the point in time you require capital because it can be absolutely critical to getting the capital you require, for the rate and terms you are prepared to accept, in the time period you need to receive it.

Sources of business financing are a bit of a moving target in terms of what you can expect from them at any point in time.  Many business owners would like to believe that the business financing marketplace is relatively static from month to month and year to year, but that's certainly not the case.

Many business owners also work from the premise that they should always apply for the cheapest cost of financing first and that the cost of financing is the key driver in the process for seeking and securing business financing.  And while cost is always an important consideration, it should not be the sole driver of the business financing decision making process.

Return on investment or ROI is the most important factor in the business financing process where you are factoring in opportunity cost over time into the decision-making process.

Let’s look at an example.

A well established company requires incremental working capital of $1,000,000.  Contracts are in hand and everything is in place operationally to immediately increase their bottom line by $100,000 a month.

The company can likely get approved for very low cost financing at their current bank, but the process, for whatever reason, is going to take 90 days to complete.  Alternative financing at a slightly higher interest rate can be secured in two week’s time and funded in less than 4 weeks.

From an ROI perspective, option B makes greater financial sense as it will stop the company from missing out on over $200,000 of revenue which would offset the higher cost of financing many times over.

So where to apply as a lot to do with when to apply. It also has a lot to do with some of the other things I’ve mentioned including deal size and complexity, the point in time in any particular year, how up to date the financials are, how clean the Credit and Legal event status is, etc.

As a general rule, it’s always easier and faster to get more financing from a lender or financing company that you either are currently doing business with, or you’ve done business with in the recent past.  Making a financing decision has a lot to do with the finance company’s understanding and comfort with your business and how you operate. 

So familiarity can go a long way.

That being said, if your existing lender(s) is slow moving, or dialing back their approvals as they head towards their yearend, or have some other complicating factor that does not allow them to 1) react quickly to your business financing request, 2) provide you with terms and conditions you are prepared to accept, and 3) can fund the deal quickly, then from an ROI driven perspective, you need to look for other options.

For the most part, all financing companies will fall into a marketplace category.  If you know what category you can qualify for financing from, for terms you are prepared to accept, in the time you require funding, then it makes sense to focus in on the providers in that market space.  

If you make an application and don’t get what you’re looking for, there is a good chance that you’ll get a similar outcome from other players in the same market category unless there is a point in time industry focus that you can benefit from.

For example, chartered banks have very similar pricing and very similar lending parameters.  They also have portfolios that have concentrations in different industries which they may be increasing or decreasing their holdings in.  Focusing on a lender that is looking to grow in your industry space can yield a much different result than a lender who is not.

The important point once again is that your business financing strategy is all about point in time … what financing company will provide the business financing you require, for terms and conditions you are prepared to accept, at a given point in time?

The business financing market place can very much be a moving target at times, so its important to consider 1) How To Apply, 2) When To Apply, and 3) Where To Apply when developing your business financing strategy.

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