In Part One of this series, we discussed how lenders are evaluating businesses and which businesses are more attractive to lenders. In Part Two of this series, we discuss borrowing strength. What does it take to match an adaptive business with a strong borrower?
Demonstrating Your Borrowing Strength
• Liquidity: Now more than ever, liquidity is an essential gauge of a borrower’s strength. Having liquidity in a down economy illustrates growth potential and an ability to withstand future economic downturns. Lenders like to see at least six months of payment reserves in liquid assets including checking, savings, and easily liquidated securities. Consider how you would handle future economic disruptions.
• Management Experience: Banks are more comfortable lending to proven managers. A management resume detailing experience and accomplishments is a common forum to highlight your ability to manage. It’s also critical to demonstrate your flexibility. Can you quickly pivot under changing social and economic conditions? Lenders like reviewing case studies and business plans, which help demonstrate that you have put time and thought into all possibilities.
• Credit Worthiness: Banks are also more comfortable lending to proven borrowers. A borrower who actively monitors their credit has an aim to be a more qualified borrower. Be sure that you remain credit healthy by keeping your debts manageable and staying on top of bills. Many borrowers forget that revolving credit, as well as medical debts, affect creditworthiness.
Krishan Patel, Managing Director of GRP Capital, advises that “Now is not the right time to overleverage yourself. Lenders are becoming more conservative through an uncertain market. If your next transaction will leave you feeling light in the pocket, then maybe this isn’t the best time to get into that project. Lenders put credit guidelines in place not only to protect their interests but to also protect borrowers from making an irreversible decision.”
Despite lenders’ increased focus on creditworthiness, there are still lending options available for businesses with borrowing strength.
Next week we’ll review how the valuation process has changed.