Magazine article CMA - the Management Accounting Magazine

Factors in Choosing a Lender

Magazine article CMA - the Management Accounting Magazine

Factors in Choosing a Lender

Article excerpt

Seeing a deal from the lender's point of view will lead you to the right financial package for the tasks at hand.

CMA magazine readers certainly know the key factors to consider before choosing a lender.

* Price of a loan comes first - especially true of healthy companies with the ability to shop around.

* Terms and conditions - These move up or down the priority scale when the margin between lenders is thin or non-existent in terms of cost.

* Availability of funding - Prudent managers want to know they can go back to the well should additional funds be required in the future.

* Knowledge of the business - A lender who is unfamiliar with a business would find it difficult to assess risk and, therefore, would be a less accommodating lender.

* Breadth of financial services - What's in the lender's product bag?

The natural tendency of a financial manager or an owner-manager seeking funds, is to think about these questions exclusively from his or her side of the table. However, seeing a deal from a lender's point of view will strengthen a manager's hand by guiding him or her quickly to the right source of funds, and help negotiate the most balanced financial package for the tasks at hand.

Here then, is a lender's perspective on two hypothetical situations, each requiring a somewhat different approach.

In the first case, a small, but profitable company is seeking financing to buy a manufacturing company with sound collateral.

This company should talk with more than one lender, but no more than three, at most. Companies - even strong ones - that call on too many lenders are often seen as "window shoppers," and not taken seriously.

Consider different types of lenders, and use more than one to close the deal. Lenders that specialize in business financing understand industry sectors, offer more flexible terms and conditions and a more carefully tailored financial package.

The importance of a business plan can't be overemphasized, even where the business is strong. Be prepared to sell the lender on the continued success of the business with an effective business case presentation, which, sometimes can negate irritating terms and conditions a lender might want to impose. Faith in management makes lenders flexible.

Consider retaining consultants who specialize in putting companies together with the right lender. They understand the "hot buttons," and play a valuable role in case presentation. Their involvement often results in a better deal and a faster response.

Three competitive proposals are usually enough to establish a competitive price for money. However, slight differences in price should not be the principal reason for choosing a lender. A difference of a quarter or even half a point may not be as important as terms and conditions that could hobble management's flexibility.

Weigh all terms and conditions. The key here is flexibility within the package being offered. Beware of red lenders with strict, preset conditions. For example, the repayment schedule should reflect seasonality, which, in turn, affects cash flow performance and the normal life cycle of the assets being financed.

Look out for security requirements: They are always a stumbling block. An unreasonable lender is one that wants a great deal of security without offering a convincing rationale.

The owner-manager of the small company under discussion probably would be asked for a personal guarantee. These nearly always cause difficulties, frequently because they are unreasonable. Make sure a lender is willing to justify its position. …

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