So you started a business. With big dreams and aspirations for the growth and success of this business you head off into the proverbial workforce sunlight, only then to feel the heat of that sun bearing down on you once reality sets in. You find yourself in need of new equipment, furniture, software; it adds up quickly.
The next step is to search out funding. Only then do you start to realize that there is a lot you didn’t know about your credit and the process by which you get said credit. Now what?
A good first step is to prioritize your needs vs. wants list. Ask yourself how much debt you can realistically take on. Lenders are interested in knowing how trustworthy you are, but the honesty needs to start with you. Can you honor your commitment to this loan and can you do it without stretching your internal finances too far?
With your priorities and expectations in order, now comes the most important part. The following are the 3 biggest things to consider when getting capital expenditure financing.
#1 What’s Your Skin in the Game?
Lenders know that you need financial help. That’s what they are there for. But in knowing that they are contributing to the success of your business, they also want to know what you’ve done or are willing to do, personally, to make your ship sail; this is also known as Capital. Have you contributed personal money? Are your personal assets tied to the business? Are you willing to personally guarantee the debt your company needs to acquire critical equipment and assets?
Lenders want and need to know that you have as much invested into your business as they do. They want to know that your personal stakes will be compelling enough to make sure you pay back the money they lend to you.
#2 What Does Your Cash Flow Look Like?
Cash Flow, or sometimes referred to as Capacity, is extremely important to any lender. The question, in essence, is will you have money to pay them back? Companies that have been around a while and that have a great track record for paying people back, usually don’t have many problems getting the funding they need.
If you are a start-up, this part is going to be hard for you to prove, so cash flow will be critical to your funding process. You’ll need to prove that your business is healthy enough to take on extra debt.
In part, the decision process will vary depending on the lender you use. Some lenders are more willing to take risks than others. But like we said, if you can show a track record of sustained cash flow, your chances are a lot stronger.
#3 What are the trends
This one may be out of your direct control, but lenders need to be very careful when and how they fund a business. Specific market or financial trends are often overlooked by companies seeking credit but are becoming increasingly scrutinized by finance companies. If negative trends exist in your industry or financial statements, make sure to have detailed explanations as to how those trends are being dealt with. Lenders understand that markets are constantly changing but they need to see that your company is proactive in navigating the ever-changing economic landscape.
Lenders are skilled at drilling down to understand a company’s competitive advantages and disadvantages. Don’t assume that you are the only company in your industry that has been or is currently being underwritten by your funding partner. Providing documents and data that outline your company’s history, forecast and plans to be at the top of your specific market can often be the difference in obtaining a credit approval or being turned down due to trends.
To sum it all up, any lender big or small, wants to feel comfortable in their relationship with you. They want you to succeed, because their success is tied to your success.