January 1, 2011

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Be a Smart Borrower

Get the Capital You Need to Grow Your Business

Tim Carfi

January 1, 2011

In 2009, Utah experienced the single great-est job decline since the Great Depression. However, the state’s unemployment rate remains below the national average, and the state is expected to gain more than 19,000 jobs in 2011, according to the Bureau of Economic and Business Research at the University of Utah. Job growth is good news for businesses across the state because it generally signals broader economic growth, which benefits state residents as well. At this point in a recovery, business owners often start thinking about tapping into new sources of capital to grow their businesses. The good news is many lenders are actively seeking new investments. For example, in the second quarter of 2010, GE Capital made $2.7 billion in loans to small and mid-sized businesses across the United States, up 135 percent from the first quarter. What makes a borrower smart and successful in the quest for capital? Drawing on our experience with thousands of commercial borrowers, GE Capital set out to answer that question. We found that there are important variables beyond cash flow and credit history. These 10 tips are designed to improve commercial borrowers’ chances of getting the capital they need. Reach Out Early The best time to approach a lender is before you need capital. Build a relationship and educate the lender about your business. A lender who believes in you and your business can be a powerful advocate during the underwriting process. If you wait until you need money in a hurry, you may limit your options and those of your lender. Treat Your Lender as a Partner View your lender as a partner with shared goals, not as a vendor. Come to the table with an understanding of the lender’s perspective. Be flexible and open-minded and look for mutually beneficial solutions. Also, get to know as many people as possible on the lending team. Not only will you have access to more information, but the process is likely to run smoother as well. Truth Trumps: Be Transparent You must be upfront. The real deal killer isn’t negative information or financial setbacks. It’s having the lender invest time and resources only to find out you’ve provided information that is materially different from what surfaces during the underwriting process. Tell a Compelling Story Every business has a story. Tell yours in a way that highlights successes and market knowledge and demonstrates how you’ve solved problems. Lenders understand that the downturn has impacted businesses. What they need to see is how you’ve overcome obstacles. Craft a forward-looking business plan, and be sure the financial information aligns with the narrative. Discrepancies will cast doubt on the entire presentation. Sweat the Details Mistakes, even if they seem inconsequential, can cause a lender to lose confidence. Don’t take the attitude that your lender will “fix” your errors. Be complete and accurate. Also, understand the key terms in your contracts and credit documents. Include a single document that specifies obligations and key dates. Find a Lender Who Knows Your Industry An industry-savvy lender will fully understand your business plan, competitive position and challenges, and can be invaluable as an advisor and advocate. Don’t underestimate the value of a knowledgeable lender. There are excellent niche lenders within the general Utah region. Ongoing Communication is Critical From day-to-day details to big changes, keep your lender informed. If an unexpected event occurs, from an important executive resigning to a facility disaster, contact your lender immediately to discuss how your ability to meet your obligations may be affected. Understand the Process Reputable lenders won’t cut corners during the process, so don’t put them in a difficult situation by asking for things on short notice or expecting them to diverge from their established protocol. For example, the trend to “amend and extend” credit can be complex and time consuming. Have the foresight to contact your lender 18 months before the loan comes due. Know Your Peers’ Financing Structures By taking the time to learn about the financing structures of industry peers and in the general Utah region, you can improve the likelihood of creating a workable financing solution and demonstrate important industry knowledge. Optimize Cash Flow Cash flow is king. Your lender needs to understand all monies coming in and going out as well as your payment history and that of your customers. Better yet, show your lender exactly how you intend to increase cash-management efficiencies. Your lender also wants to see that you have sufficient cash to cover unexpected expenses or unforeseen events. Come to the Table Utah businesses have worked to carefully manage their costs in preparation for post-recession growth, and now borrowers who work in a spirit of collaboration with their lenders can boost their chances of success. Borrowers should look to their lenders to be flexible, have enough capital on hand to support them through both good and tough times, and have the industry expertise to understand the true value of the collateral used to secure loans. For well-managed businesses, capital is flowing again, so make sure to come to the table as a smart borrower. Tim Carfi is the President and Chairman of GE Capital Financial Inc., Member FDIC, a Utah state chartered bank.
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