Dressed For Capital Success The Top Five Ways To Attract Business Financing

Author : Michael Shelton

The pursuit of business funding is like a capital courtship. The competition for attractive business loans and start-up capital is intense with lenders and investors searching for the most promising and creditworthy companies. Attractive borrowers at the debt dance scan the lending crowd for the best terms and rates. The A-list lenders are looking for beautiful borrower sponsorship. The most eligible capital providers hunt for hotly pursued entrepreneurial companies with solid credit capacity. Start-up companies with a limited track record become wall flowers. Do you need a capital markets makeover to attract the sources of funds your business desperately needs? Here are the five most important credit qualities that attract good business capital.

You Have Valuable Collateral: The best small, mid-sized and large business borrowers have desirable loan security. The lender is looking for proven business revenue to service the debt. The loan collateral cash flow must comfortably cover the scheduled principal and interest payments. The debt service coverage is expressed as a ratio of the amount of net operating income divided by the scheduled debt service. Lenders look for a level of 1.25 times or more depending on the borrower and current credit cycle conditions. The value of the collateral is another major factor the capital provider uses to determine funding levels. The loan-to-value (LTV) ratio varies depending on the credit risk profile of the borrower, the collateral and current credit market conditions.

You Have Loan Administration Systems in Place: The loan closing is just the beginning of the borrowing relationship. Your lender will demand timely and accurate financial reporting. The bank will reach out to you throughout the term with a variety of requests for information. Your documents will contain specific obligations, procedures and delivery dates. Failure to comply can be a default! Do you have the capacity to satisfy standard lender requirements for financial reporting, covenant compliance, consent processing, collateral inspections, site visits and interest rate management? The attractive borrowers have theses capabilities. Your lender gets comfort from receiving your information with a consistent look and feel. You can enhance your perceived credit worthiness with a professionally managed loan administration system.

You Have Multiple Sources of Repayment: The attractive borrower has valuable collateral to post as security for a loan and other sources of repayment for the lender. Many lenders require a loan repayment guaranty from a qualified business entity or individual. Be very careful about signing a loan guaranty on a business or personal level because it will increase your financial exposure. Start-up companies and entrepreneurs are lured into signing personal guaranties to fund their company ambitions. If the borrower fails to pay or violates the loan agreement the lender can look to the guarantor for repayment. Some lenders attach other collateral as security for a loan even if the primary collateral generates sufficient cash flow to cover debt service.

You Have Excellent Borrower Sponsorship: The parent company or another interested party is also known as the borrower sponsor. Your company and sponsor’s reputation, industry standing, years of experience, net worth and balance sheet strength all play a key role in the lender’s evaluation of your credit application. A banker will feel much more comfortable lending to someone who has a sponsor with deep industry experience. A strong sponsor balance sheet with reasonable leverage and lots of cash or other high quality assets is the foundation for a creditworthy guarantor. A start-up company will have a more difficult time securing financing without a strong sponsor.

You Have an Unblemished Credit History: Last but not least the borrower should have a clean credit history, especially with the lender from whom they hope to borrow money. Small, mid-sized and large business borrowers that have a history of reliable repayment during good and bad economic periods are considered more creditworthy. The start-up entrepreneurial company with limited credit history should plan to use credit strategically to build a borrowing and repayment track record. Like the leopard eventually shows its spots the borrower can be identified based on its credit history. A lender that has been burned on a previous loan is less likely to grant credit to that borrower again. Make every effort to keep a good relationship with your lenders by doing what you said you would do in the loan agreement.

These and other steps can make your small, mid-sized or large business more attractive to lenders. Beef up your borrowing systems and shape your credit profile to improve your chances of getting to YES at the capital markets dance.

Michael Shelton is President and CEO of Shelton Business Services which provides executive coaching, management consulting and financial services. Call 602.463.1199, email clientcare@sheltonbusinessservices.com or visit sheltonbusinessservices.com Advance your business ability with our proven executive coaching, objective management consulting and dependable financial services.