7 Commercial Lending Tips for the New Year

Most growing companies find they need extra working or investment capital at some time in their life cycle, and commercial loans are available for most types of businesses. If you’re considering incorporating a loan into your financial plan, or the plan of a company you sponsor, in the upcoming year, here are some tips to make the most of borrowing opportunities.

1.    Start thinking strategically…now

It’s a common mistake to think about borrowing only when a business needs money immediately. But planning ahead gives you a chance to qualify for better loan terms. Lenders will view you as a better credit risk if you borrow while your cash flow is relatively healthy and can show a written plan for using the loan to strengthen your company’s financial position, instead of just to patch holes. Planning ahead also gives you time to develop clear documentation that can help you move quickly and smoothly through the application and underwriting process.

2.    Match your options with your needs

Spend time planning what your loan proceeds will be used for and align your loan structure with those uses. Do you need a line of credit that can be accessed as needed for a variety of ongoing working capital needs? Or are you preparing to make a one-time purchase of a long-term asset? A strong lending partner can help you appropriately match your financing needs to the loan structure.

3.    Prepare and understand your financials

Once you’ve selected an appropriate loan structure, research the type of documentation you will need to qualify. Documentation requirements vary by loan type. Some of the items that may be required include: bank statements, business tax returns, profit and loss statements, balance sheets, A/R aging reports, A/P aging reports, inventory reports and debt schedules. Your lender may want to analyze certain cash flow ratios also. And if you apply for an asset-based loan with equipment as collateral, you will need an equipment appraisal by an accredited appraiser.

4.    Find the right financial partner

It’s crucial to find a lender who understands your industry, takes the time to understand your business and supports your goals. To discover what you need to know about a prospective lender, you can look at the company’s profile online, check for online reviews and, most importantly, ask for client references. Talking to people in the same or a similar industry—or business advisers— can give you the clearest idea of the level of service and responsiveness you can expect from a lender.

5.    Understand your loan documents thoroughly

Loan documents are complex. Before your final agreement is drafted, you may get a document known as a term sheet. This term sheet will typically list in summary fashion eligibility requirements, financial covenants, notices, and events of default. For an asset-based loan, it will also include information about calculation of collateral eligibility, eligible receivables, eligible inventory and any reserve conditions. It’s important to understand all of these terms and know exactly what you can and cannot do with any listed assets during the period of the loan. Talk over any potential issues or questions with your lender at the beginning.

6.    Make compliance part of your normal process

To avoid unnecessary delays or defaults, set up processes at the beginning to help keep your reporting on track. For example, create a compliance checklist for your staff that summarizes all of your loan requirements in layman’s terms. It also may be helpful to tie your reporting into monthly/quarterly financial or other periodic reporting. This will make it less likely that any of your requirements will be forgotten.

7.    Build a climate of mutual trust with your lender

Building and maintaining a close relationship with your lender can make a significant difference in the borrowing experience. Choose a lender who is focused on service and be sure to keep your lender apprised of any financial or reporting issues in as timely a manner as possible. Lenders are more likely to work with a company if they are not caught off guard and they also may have more options at their disposal during the early stages of a problem. The goal is to enlist your lender as a true financial partner who will be flexible and responsive in finding solutions to any challenges you might face.

 

Gibraltar’s client-centered approach to creative, responsive financing solutions has supported viable growth for businesses in transition in a variety of industries. If you are a company considering a commercial loan or a private equity sponsor seeking growth financing for a sponsored portfolio business, talk to a member of Gibraltar’s expert sales team to learn how asset-based financing and our extensive experience can help.

 

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