January 17, 2020

Viewing your lender as a business partner

It’s easy to get intimidated when applying for a business loan. You have the need; the bank has the money — how can you win them over? One way to lower the stress level is to view your lender as a partner rather than a gatekeeper. After all, it needs your business just as much as you need the loan.

Articulate a clear plan

Say you’re asking for money because your construction company has fallen behind on its supplier payments and needs the cash to catch up. There are better ways to phrase this request, such as that you need working capital to complete one or more profitable projects.

Or, as another example, you need the money to bid on jobs beyond your usual geographic area. Here you can support your request by producing solid market analysis that convinces the lender that your construction business stands a good chance of succeeding in the new locale.

The bottom line: Before asking for a loan, make sure you’re able to clearly articulate a plan for the use of the cash and that you’ve documented a reasonable ability to repay the loan. You and your top managers should be able to verbalize your plan but craft a written statement, as well. It can be as short as one page if it clearly describes your business challenge, your strategies for overcoming it and how the lender’s money plays into this solution.

Shop around

When you look at a new financing arrangement as a partnership, you can shop for a lender, just like a lender is selective about its customers who borrow money. If you have a long-standing relationship with a banker, make that your first call. It’s important to have good communication and an amicable rapport when negotiating terms.

But should your local banker not offer loan terms that are favorable to you, don’t hesitate to shop around. Look for a lender with multiple loan products, so you have a better chance at structuring one to your liking. And get some references to the quality of service and support.

If yours is a small business, check into the availability of Small Business Administration or other government-backed loan programs. These are often designed to boost local economies, so you’ll probably be able to achieve more favorable loan terms and interest rates.

Know your numbers

We live and work in an era of “big data.” Lenders are certainly active participants, keeping a keen eye on metrics that help them accurately estimate risk of default.

As you look for a loan, determine how each prospective lender will evaluate your default probability. Lenders tend to use multiple financial ratios to assess a construction company’s creditworthiness. When one of these key ratios goes askew, a red flag goes up on their end — and should on yours as well.

For example, lenders will track the cash asset ratio, which measures the amount of cash available to pay current liabilities. If your cash asset ratio starts slipping, you’ll likely need to push accounts receivable to clamp down on slow-paying owners or general contractors or tighten up on spending.

Bear in mind that not every lender may use ratio-based evaluative methods — or use them alone. Some use community-based scoring, by which a selected group of finance professionals rate and review companies based on their payment histories. Others use proprietary commercial-scoring models that use creditor reports to develop credit scores for businesses.

Time it right

A well-timed capital infusion can serve as a tremendous boost to a construction business. And viewing your lender as a partner should help you more confidently and selectively approach what’s often a stressful process.

Of course, a lender isn’t literally your business partner. Strictly speaking, partners are equity stakeholders, whereas a lender could force a construction business to shut down if it can’t collect on a loan. Work closely with your CPA to decide whether outside financing is appropriate at this time and, if so, how a reasonable loan should be structured.


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