Navigating the Shifting Tides of Business Financing
By: Anne Mask
Navigating the Shifting Tides of Business Financing: A Guide for SMBs Seeking New Lenders
As a financial services professional, I've witnessed a dramatic transformation in the world of traditional banking. This shift is having a profound impact on small and medium-sized businesses (SMBs), with two significant trends emerging: the "too small" conundrum and the unexpected fallout for those businesses that haven't breached any lending covenants.
The first trend stems from a strategic reevaluation within many banks. Some institutions have recently reviewed their loan portfolios and imposed stricter minimum loan or line of credit (LOC) sizes. This shift is forcing numerous smaller clients to seek out alternative financing options. Let me illustrate this with a real-world example: I'm currently working with a prospect who had a small Asset-Based Lending (ABL) Facility secured by accounts receivable, inventory, and equipment. This business hasn't violated any covenants, yet the bank has decided that it no longer meets their new size requirements, compelling them to search for a new lender.
The second trend is taking place in banks with extensive Commercial Real Estate (CRE) exposure. They are reassessing their portfolios to mitigate potential risks, and businesses within the Commercial and Industrial (C&I) sector that trip one or more covenants are being nudged towards alternative financing. For instance, I'm currently assisting a company that has been around for over half a century. They had a traditional line of credit with a bank until 2022 when a financial loss triggered a covenant breach, resulting in the bank requesting them to find a new lender.
In both scenarios, businesses are delving into the alternative lending space in search of a new financial partner. Given the myriad lenders vying for their business, it's paramount to approach this transition thoughtfully and strategically. In this blog, I'll share the key considerations for SMBs embarking on the journey to find a new lender amid these changing tides, ensuring that they secure the financing they need for growth and stability.
7 Best Practices that Set You Up for Success When Choosing a New Business Lender
Whether you’re a startup company looking for initial capital or a growing business seeking more flexible financing, finding the right business lender is crucial to keeping your company on track with its business and financial goals. But determining the best lender for your business can be a daunting task. Many companies don’t know where start or what to look for (or avoid) when it comes to choosing the best financial partner.
In the following article, we’ll explore seven best practices that can help guide your efforts with targeted suggestions and key criteria to thoroughly evaluate and narrow down potential candidates based on your specific business needs, goals and priorities. You’ll also learn how to avoid some common pitfalls that can take your search off track or lead to costly business disruptions. Whatever your reason for choosing a new or replacement business lender, taking the time to fully understand and evaluate the strengths and value each lender brings to the table can help you on the path to a strong and enduring financial partnership that supports and grows your company’s success at every stage of business.
Assess Your Needs First
Before you begin evaluating potential lenders, take time to fully assess your company’s financial needs, business requirements and growth goals. This includes understanding the purpose of your financing, the desired terms, and the level of flexibility you need based on day-to-day financial commitments, working capital requirements, sales cycle gaps or other business or industry challenges. Also factor in your company’s technology, processes, inhouse capabilities and resources as well as your general business culture and other considerations that could be relevant when determining the right financial partner and solutions for your business.
Prioritize Relationship Over Rate
All too often, business leaders rank one factor above all others when evaluating potential business lenders: borrowing rate. Although cost of funds is certainly important, it shouldn’t overshadow other criteria that can be far more critical when it comes to determining whether a lender is a good fit for your business. Instead, take time to evaluate candidates based on a broader range of criteria that provide insight into their strengths, solutions and other qualities that are essential to building and maintaining a strong financial partnership. By prioritizing relationship over rate, you’re more likely to choose a lender that not only aligns with your company’s financial needs and goals, but also delivers on the core competencies and qualities you value most in a trusted financial partner.
Delve Deep with Due Diligence
Evaluate potential lenders based on their reputation, track record, and other qualities that you want and expect in a financial partner. Some key criteria to consider include:
- Stability/Longevity: Take a look at each lender’s track record, tenure in the industry, and the reliability of their funding sources. Solid longevity often indicates a commitment to the market and a solid financial foundation.
- Experience: An experienced team contributes to the overall quality of a lender. Assess not only the lender's years in operation but also the cumulative experience of their staff in dealing with diverse financial scenarios.
- Industry Know-How: Industry-specific expertise ensures that they comprehend the unique challenges and opportunities your business faces, tailoring solutions to suit your needs.
- Reputation/Customer Reviews: Look at online reviews, case studies, testimonials, and industry reports to gauge each lender’s quality of service and commitment to customer service. If possible, get customer references, especially from businesses that are in a similar industry or situation to yours.
Explore Solution Offerings
Different lenders offer a variety of financial products, so be sure that the solutions they provide are in sync with the type of financing you require. Many small and mid-sized businesses, for example, may need more specialized, alternative financing solutions that are based on the value of their business assets rather than historical cash flow. Consider both the diversity of solution offerings and the lender’s willingness to tailor structures and terms to meet your specific needs while ensuring they have the capabilities and expertise to deliver on their promises. Some key factors to consider include:
- Flexibility & Scalability: Is the lender willing to work with you to tailor solution terms and facilities based on your specific needs? Also, do they have the capacity to scale with your evolving funding requirements or help you graduate to lower cost financing options?
- Facility structure: Do you have a clear picture of how the lender’s loan facility will operate, including additional fees, concentration limits, eligibility criteria, processing times, and audit requirements?
- Asset mix alignment: Can the lender finance your specific asset mix? This is particularly important when considering specialized solutions such as Accounts Receivable Financing and Asset-Based Financing.
Factor In Business Basics
Building and maintaining a successful relationship with your lender often comes down to how well you work together. Technology, processes, communications and other factors can make a big difference in your ability to stay connected, work efficiently, and grow your partnership over time. Some key factors to consider when assessing a potential lender include:
- Partnership Approach: Choose a lender that expresses a genuine interest in learning about your specific business and financial needs. That will translate into more personalized service and solutions. Also make sure you have ready access to the right people and decision makers who can help streamline processes and approvals, especially when urgent needs arise.
- Transparency and Communication: Choose a lender who communicates clearly, provides transparent terms and conditions, and responds quickly to needs, concerns and questions.
- Tech Savvy: Choose a lender that uses technology to your advantage by embracing tools and systems that help save time and costs while increasing accuracy, communication, and transparency.
- Alignment of Values: Make sure you share common ground when it comes to the values that define and drive each lender. A shared ethical foundation can help pave the way for a better working relationship between your team and theirs.
Minimize Hassles & Headaches
Selecting a new or replacement lender can seem daunting, but a few simple suggestions can help streamline the process and prevent common hassles and headaches along the way. Some key tips to help ensure a smooth and successful experience include:
- Be Proactive: Don't wait until the last minute to choose a new lender. Establishing a new financing relationship takes time, so start early.
- Consult an Expert: A reputable business consultant can guide you through the process, helping you understand your financing needs and engaging with potential lenders to obtain proposals.
- Be Timely & Transparent: Be transparent with your financial information and respond promptly to lender requests to speed the approval process.
- Ask Questions and Involve Your Team: Hold round-table meetings with key team members to understand the lender's expectations. Asking questions ensures clarity and alignment of objectives.
- Comparison Shop: Narrow down your choices to just a few lenders for a more in-depth review. Avoid drowning in an excess of proposals by focusing on a select few.
Plan Ahead to Stay Ahead
Even if you currently have a business lender, it pays to be prepared in case your situation changes. Many banks and other traditional lenders, for example, are starting to move upmarket due to shifts in strategic priorities, risk appetite or in response to broader economic trends. That means even if you’ve faithfully met your financial obligations and maintained strong performance measures, you may suddenly find yourself in need of a new lender. At the same time, some businesses may be grappling with challenges, such as breaking covenants or facing financial difficulties, that require them to seek new and alternative sources of funding to support their day-to-day business. Regardless of where you are today in your financial journey, knowing what to look for and how to effectively evaluate potential lenders can help you avoid costly business disruptions and stay on track with your business and financial goals.
Choosing a new or replacement business lender is a strategic decision that every business should be prepared to make. By following best practices that help you avoid pitfalls while prioritizing factors that align to your specific business needs and financial goals, you can transform the challenging task of choosing the right lender into a confident and well-informed journey that leads to better outcomes for your business today and in the future.
Oxford Commercial Finance (OCF) provides flexible working capital solutions to help small and mid-sized companies nationwide improve cash flow and accelerate business growth. Our experienced team is dedicated to working with you to maximize your borrowing capacity, so you have the support and liquidity you need achieve your business and financial goals.
Visit oxfordcommercialfinance.com to learn more about the diverse solutions, innovative problem-solving and personalized service that makes us the lender of choice for companies at all stages of business growth.
Contact our team today or visit www.oxfordcommercialfinance.com