Lenders are skilled at matching the right size of home mortgage or auto loan to monthly payments that a borrower can comfortably afford, but what about lending in a business environment? It’s not always quite so obvious or simple.
Size + Structure
Banks lend money. It’s what they do. The dollar amount you qualify to borrow rolls right off their tongue, right? It’s an easy answer. But not all of them will tell you if you should borrow, or what the perfect dollar amount might be.
Just because someone can afford a certain level of payment based on their revenue and operational costs doesn’t mean it’s the correct size to help their business grow, or if they are at the right life stage of their business to take on more debt.
Too much debt can propel a business into bankruptcy just as fast as too little.
It’s not the size of the loan that’s critical—structure matters, too. The type of loan and how it will be repaid can have a powerful impact on success or failure of a business.
Are you using a line-of-credit loan to cover payroll, when your business has grown enough to support a loan that uses accounts receivable as collateral?
There are many, many different types of commercial loans and a banker who only considers the loan package du jour can do unimaginable harm to a business.
For lasting success, it’s important to bypass “one size fits all” loan products in favor of strategic, custom financing that matches the size and structure of a loan to your need.
Figuring this out is called “right financing.”
Right-finance Bankers Look Deeper
A “right finance” banker looks beyond “can they pay this money back?” and consider HOW it will be paid back. They look at the life cycles and cash flow of your business, and consider how that impacts financing options.
Right finance bankers seek a stronger, long-term relationship with lasting benefit for their client and the community, because they’re investing in something more than ability to pay.
Right Financing is a relatively new concept in banking, and it’s something only a banker with robust business experience can provide. It’s about looking beyond the amount approved or how much a borrower thinks they need, and taking a deeper look at the business beyond financial spreadsheets, debt-to-income and projected revenues. It’s looking past the ability to make payments and asking harder questions that help a banker identify that the borrower asking for a $40,000 cash flow loan actually needs a $100,000 working capital loan to be successful, or vice versa.
What kinds of questions might a right finance banker ask? Here are a few examples:
- How much money does the business need to make a larger profit, and grow at a manageable rate?
- Do you need money to grow… or to stay in business?
- What areas of concern do you have for your business?
- How do your cash flow cycles work?
- If you have inventory, what are your product life cycles and demands?
- Are your assets leveraged in the right manner help you minimize risk?
These aren’t the kinds of questions asked by most bankers. They’re in a hurry or perhaps you’re in a hurry. Right financing requires a more intense scrutiny of a business’s analytics, assets and processes – all of these things take time.
However—in return–you gain a coaching relationship focused on bigger successes, instead of just today’s dollars.
Arizona’s economy is coming back strong. Many businesses have weathered the storm and come out stronger for it. If you’re ready to expand, discuss right financing with your banker today. Custom, personal banking can provide you with a powerful, unexpected advantage over your competitors, and position you for a far more successful future.