Whether a business is seeking a line of credit, financing new equipment, acquiring another company, or raising investment capital, preparation can make a significant difference.
I've been involved in financing discussions from both the operating and financial sides of a business. One thing I've learned is that having a good business isn't always enough. You also need to be able to explain how it operates, how it performs financially, and how the requested financing will be used.
A lender, or possibly even an investor, may be interested in the opportunity, but they'll also want to understand the risks.
Know What You're Asking For
Before approaching a bank or investor, it's important to be specific about the amount of financing needed and what it will accomplish.
Is the money intended to support seasonal working capital, purchase equipment, fund expansion, or provide a longer-term source of capital?
Those are different needs, and they may require different financing structures.
A business seeking a line of credit, for example, should understand its working capital cycle – when cash is spent, when customers pay, and how the borrowing will be repaid.
An equipment loan may be evaluated differently, with attention to the asset, the company's cash flow, and its ability to service the debt.
Be Prepared to Explain the Numbers
Financial statements are important, but lenders and investors generally want more than historical results. They may ask questions about margin changes, receivables increases, or how cash flow compares with reported income. What assumptions support the company's projections?
If management can't explain the numbers, it can create uncertainty about the business.
Depending on the situation, a useful financing package might include some or all of these:
Historical financial statements and current interim results.
Cash flow forecasts and financial projections.
A clear explanation of the financing request and use of funds.
Debt schedules and an analysis of repayment capacity.
Key operating assumptions, risks, and expected business performance.
The information doesn't need to be unnecessarily elaborate, but it needs to be accurate, consistent, and appropriate for the financing being requested.
Look at the Business from the Other Side of the Table
It's easy to focus on why a business needs financing. But it's equally important to understand how the lender or investor will evaluate the opportunity.
- A bank is concerned with repayment capacity, collateral, cash flow, and the financial condition of the borrower.
- An equity investor may place greater emphasis on growth potential, management, market opportunity, and the return on the investment.
In either case, unanswered questions or inconsistent financial information can make the discussion more challenging.
I'd rather identify and address those issues before the first meeting.
Sometimes that means improving financial reporting, preparing a realistic forecast, or examining whether the business can support the amount of financing being requested.
And sometimes the analysis suggests that the business should consider a different approach.
Preparation Creates Options
Not every financing request will be approved, and even a well-prepared business may find that the available terms aren't attractive.
But preparation gives management a better understanding of its financial position, the alternatives available, and the commitments it may be taking on.
That information is valuable whether the business ultimately borrows money, raises equity, or decides to pursue a different course.
A productive financing conversation starts with knowing your business and being able to explain it clearly.