Need Money, Think Like A Banker

By Greg Niemi . April 9, 2013

Do you need to refinance, restructure debt or get a new loan?  Then follow these three steps to think like a banker to obtain the financing you need.

To cut to the quick you will need to be clear about 1) how much you want, 2) how you will repay the debt and 3) what security will you give?Think Like a Banker

Too many borrowers do not think these matters through before they go to the lender (bank, private equity, family, etc.).

How Much Do You Want?

Your financier wants to know precisely how much you want and what you want it for.  Spell this out in a simple list.  Lenders like to see more tangible loan items yet they are also very receptive to operating loans to finance operations.

Do you want to borrow 100%, 80%, … of the value?  As basic as this advice may appear I have seen far too many be too vague too often with loan requests which sound like “I think I need …”.

How Will You Repay?

Most lenders will look to your balance sheet first for working capital, cash position and equity.  Next they’ll look to the income and cash flow statement(s).

You should have a good idea beforehand of the lenders loan terms:  interest rate, payment term and payment amount.  Rates and terms are commonly published on lenders websites and the payment amount can easily be calculated by using loan calculators also found on their website, in your desktop software or the internet.

Doing these calculations in advance helps you determine if the payments fit within your budget.  It also shows to your lender that you have thought this through.  Furthermore, be certain to share projections of any added income, profit, sales, price increases or other incremental upsides to further build confidence the cash flow will be there to repay?  Bankers like this.

What Security Will You Give?

When borrowing for a tangible asset it is reasonable to expect that asset will be pledged as collateral plus a UCC-1 will be filed.  However, what added security interest(s) are you willing (or not willing) to give?

Would you pledge additional fixed assets as security for this loan?  Or, pledge current assets such as inventories or accounts receivable.  Are there any debt covenants attached to this loan?  Is there already in place some general services agreement with this (or other) lender?  Lenders prefer not to be in the second secured position.  And/or, will a personal guarantee be required?

The more security you provide is not necessarily good news because the more security interest you need to provide the more insecure the lender is in the deal.

Summary

In summary, when borrowing be prepared to clearly answer 1) how much you want, 2) how you intend to repay and 3) what security you will give?

Have the answers written to these three items written down in a simple outline form which can be presented to your lender (along with having any supporting documentation along with you).  Clarity overcomes doubt.  Do not wing it, be prepared.

When you put on your hat to think like a banker you will improve your ability to obtain the financing you desire.

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