When borrowing against a business, whilst the financial elements are clearly important, they are only part of the picture!
In our last post we outlined the key criteria Banks use when faced with a request to lend against business assets and cashflow. However, meeting the criteria we outlined is just the starting point.
For a Bank to consider lending money against a business, they need to achieve a level of comfort around a number of factors which include:
- The business value proposition
- How the business is run on a day to day basis
- The underlying policies and systems – how effectively they are implemented
- The quality of professional support and how this is utilised
Borrowing Against a Business – Your Value Proposition
When borrowing against a business, it is important to ensure the Lender understands your business value proposition.
That is:
- Why the business exists – from the customer perspective?
- Your target audience – major customer groups?
- Why they choose you instead of the competition?
- What is different about your business relative to the competition?
- Your strengths – what they mean for your customers? How do they give you a competitive advantage?
- Why your customers keep coming back?
A clear and well-articulated value proposition is critical for any business owner looking to borrow against a business.
Borrowing Against a Business – Policies & Systems
Robust internal policies and systems are essential. They provide Lenders with peace of mind.
Not only do they help protect a Lenders position, but robust internal policies and systems invariably:
- Assist decision making
- Improve productivity
- Help avoid ‘knee jerk’ reactions
- Minimise expensive mistakes
- Add value to the business when it comes time to sell
When seeking to borrow against a business, it is important to educate the Lender about the policies and systems you have in place and how they:
- Are implemented on a day to day basis
- Protect both the business and Lender position
Lenders want to ensure your business has strong management in place to cope with changing market and business conditions.
Undocumented Systems & Policies Don’t Count!
Documenting policies & systems is important as it can help ensure their intent, & process for implementation, is clear.
Documented policies and systems also assist with decision making. They provide Lenders comfort, that if something happens to the owner, others will be able to run the business.
A low-cost tool business owners’ can use to document policies and create “how to” documents for employees, (and future buyers of the business) is Snagit:
With Snagit you can capture and annotate anything on your computer. You can also create videos – which is great for outlining processes for employees.
How You Track Performance is Critical!
- Accounting software
- Customer Relationship Management Software (CRM)
- Sales Management Software
- And more
The more the software you use can be integrated – the more useful & powerful the information will be!
How Data is Used is Important!
It is one thing to have access to such tools – the question is, are the tools being used to monitor and improve the performance of the business?
Ideally this would include:
- Creation of monthly forecasts linked to both a Profit & Loss and Balance Sheet
- Tracking performance to budget monthly
- Reviewing aged debtor, creditor and stock listings at least monthly
- Knowing what you need on a weekly basis to cover your expenses (including owner’s drawings) and a margin for profit is also extremely important. ( It allows early adjustment of strategies / actions if things are not going to plan)
- Actively managing your sales funnel
Understanding how you use data to track the performance of your business can provide Lenders with peace of mind.
Quality Professional Support is Critical
A common characteristic of businesses that enjoy sustained success is their preparedness to engage professional external support.
What this looks like will vary from business to business depending on the industry – but could include:
- Accountants
- Lawyers
- Business Advisers/Consultants
- Business Mentors
- Financial Professional
- Etc.
Professional support can give Lenders comfort that input is being received that will help the business remain relevant in a highly competitive world.
Accountants can play a crucial role, particularly when their support extends beyond tax and accounting advice.
Educate the Lender!
Lenders and Bankers are financiers. They are generally well educated and good at what they do. They also have likely worked with a wide range of businesses.
However most have never run a business! This is not a criticism, but a simple reality!
Therefore, it is important, not to assume they will understand your industry, how you run your business, acquire and retain customers and manage risk etc.
Investing the time to educate your Lender or Banker about your business can have a big payoff!
Summary
As stated at the outset, borrowing against a business is about more than just the numbers!
Your financial data obviously plays a critical roll and it needs to stack up. However, how you run your business on a day to day basis is of equal importance.
In fact, how your run your business is what mitigates the risk for the Lenders!
It is therefore important to ensure you have the right policies and systems in place and educate the Lenders about how you run your business.
If you would like to learn more about borrowing against a business, don’t hesitate to get in touch!
