A Debt Lender Profile Can Contribute Useful Insight To The Business Financing Process
In terms of the overall business financing marketplace there are numerous sources of both debt and equity available. The rest of this section will only focus on debt based providers as debt based solutions are by far the largest source of business financing available to small and medium sized businesses.
That being said, most of the information provided in this guide can also be applied to both Debt and/or Equity business financing scenarios.
Debt Lender Profile
When seeking business financing from a lender or supplier of a debt financing instrument like a loan, lease, mortgage, line of credit, credit card, debenture, or note, its useful to have a basic understanding of how these types of organizations operate and how to use the information when targeting lenders or financing companies with a business financing request.
For the most part, debt based financing is lower cost than equity based financing. It also tends to be easier to access and has more supply options from a highly diverse lending network.
Before we get into lender business models, there is a couple of fundamental things you should always keep in mind when trying to locate and secure money from a debt lender.
First, the focus of any debt lender is to off load risk and price their product to the risk they are taking. Lenders work to structure deals so that they won’t lose money through the mitigating factors they deem important for any particular application. This doesn’t mean that they don’t lose money on loans they extend. It refers more to their fundamental approach to business of taking very calculated and predictable risks a very high percentage of the time.
Second, many business owners and managers believe that lenders have greater credit granting flexibility than they actually do. All lenders have a “Credit Box” that outlines their credit extending criteria which is applied to all loan applications they receive. In general terms, a lender’s credit box is more rigid than flexible. A lender’s goal is to issue debt for financing requests that fit into the requirements of their credit box and if the application doesn’t fit, it should be declined.
Third, there can be considerable differences from one credit box to another which makes it important to have a basic understanding of where a particular financing request, made at a particular time, will fit into the debt financing marketplace.
Let’s discuss credit box rigidity a bit more. Financing companies are businesses that seek to make a profit and grow their value over time. Similar to any other business, success typically follows companies that get really good at providing a product or service that the market wants, for a price the target customers are prepared to pay, and can scale their output without messing up the level of quality and performance the customer expects.
Business financing companies are no different.
Each of them works within a slice of the overall business financing market place, focuses in on one type of lending, determines how to effectively manage risk for the products being offered, develops a delivery system, and scales the business to generate greater profits.
If any profitable business steers to far away from their knitting, then the probability of financial disaster tends to loom right around the corner.
Lenders are absolutely no different in this regard.
Which leads into the next subsection, Business Models of Debt Providers.