How to Make Your Company Attractive to Lenders

As we approach the end of 2014, the US economy continues to show measurable progress and for many, it finally feels like the financial crisis is solidly in the rear view mirror. Yet, despite the improving picture, many middle market companies are still struggling to find the capital necessary to pursue growth or address challenges facing their business.

Companies seeking financing should evaluate all possible sources of capital – from traditional banks to alternative, non-bank lenders – and they should have an idea of what lenders will be looking for at the outset. Different types of lenders base their decisions on varying criteria, but there are some basics they often agree upon when determining whether a company is an adequate credit risk.

Quite commonly, many companies that successfully grow from a startup into a mature organization often overlook simple best practices that lenders look for in evaluating a credit. Understandably, senior management is often focused on growing the business, but the sooner the team can focus on the practices that make itself an attractive credit, the more successful they will be in receiving a favorable financing down the road.

Founder-led companies, in particular, often lack the necessary infrastructure to attract lenders, especially when they are in the earlier phases of growth. One founder-led company that has navigated these challenges well and successfully secured financing is Marbles: The Brain Store (“Marbles”), a specialty retailer that offers handpicked and expert-tested products to strengthen and stimulate the brain. As a growing niche retailer, Marbles was seeking capital in 2013 to further its expansion.

“Finding the right sources of capital has been a big focus of my job – certainly a bigger portion than it should be when you’re trying to grow a company,” said Marbles founder and CEO, Lindsay Gaskins. Marbles, like many founder-led companies, benefits from a nimble, startup mentality and operates in a ‘lean and mean’ fashion, with the executive team handling multiple roles.

Whether in need of near-term financing or planning for capital requirements down the road all companies can benefit from examining their business from the lender’s point of view and can implement simple steps to professionalize their business so that when the time comes, they can present a more attractive – and creditworthy – picture. Best practices companies seeking capital should bear in mind include:

• Have a realistic, up-to-date business plan

A generic, cookie-cutter, business plan will not instill lender confidence. Lenders like to see formal, forward-looking plans that are realistic and aligned with the company’s objectives. This is an area where Marbles has excelled. Gaskins and her team do a major update of their plan annually, and also revisit the plan numerous times throughout the year, making tweaks as challenges and opportunities arise.

“We continue to pivot to meet evolving customer needs and expectations, and making sure we have an updated plan that the team can follow is important to keeping the firm aligned,” Gaskins said.

A reasonable lender will not expect a company to hit its business plan dead on, but will look for a management team that is able to navigate the plan and account for changes that arise, both good and bad

• Know exactly where the business makes and loses money

While it may seem basic, it is not uncommon for companies to be unable to pinpoint where they’re making or losing money. Continually reviewing your internal data and performance metrics is critical to identifying opportunities for growth or areas where you need to course correct.

Gaskins shares, “You have to pay attention to the little details to drive profitability. Having a CFO, analyzing in-store and online sales data and really making sure the company is accountable for spending are all things we’ve found essential as the business has grown.”

• Understand macro trends and how they may impact your business

In addition to fully understanding the customer base and ins and outs of the business, companies cannot afford to ignore the larger industry ecosystem in which they operate. Founders and managers need to adopt a broad mindset and have an outlook that transcends balance sheet management.

“You always have to be listening and paying attention to the customer and watching where the trends are going, not only in your own business but in your peers’ businesses too,” Gaskins said. “You have to be open to change and at the same time, remain focused on executing your business plan.”

• Be in tune with traditional underwriting requirements

When seeking financing and meeting with potential lenders, companies should understand and be able to meet traditional underwriting criteria. Does your company have audited financial statements? What types of infrastructure and systems have you invested in to date? These are questions to ask before you pursue financing. If you find that your company is lacking, making improvements to your systems and reporting will be a priority.

“As Marbles has grown and sought out more sophisticated types of financing, I’ve found that having more structure from the accounting and finance side of the business has been important,” Gaskins noted.

• Take advantage of specialized expertise

Don’t underestimate the value of expert advice from specialized consultants, advisors, accounting firms, etc. Rarely is a business issue so unique that an industry expert hasn’t been there before. And while it may seem expensive in the near term, many companies find that the long term benefits of a third party advisor far outweigh the short-term costs.

“I leveraged my professional network to connect with Kathy Tierney, former CEO of Sur La Table,” said Gaskins. “She is now on our board and has brought a lot of value to the business and to me personally as a business mentor.”

• Build a management team for the future

In addition to financial metrics, many lenders look to the depth of a company’s management team, as well as their plans for succession, to gauge potential success as a business and a borrower.

At Marbles, the company’s senior leadership team is well-versed in the business across the board and would be equipped to continue amid a management change. Gaskins notes, “We have a strong team that meets regularly and they know the business well. There’s cross functional ownership to keep the business going and growing.”

The process of professionalizing a company takes investment and a long-term mindset. It is surely easier to focus on the day to day tasks of running a business, but with a broadened vision and by taking the time to find a lender that values a long-term partnership, business owners will be able to focus on what matters most – moving the business forward.

Andy Moser is Co-Founder, President and CEO, Salus Capital Partners. Andy is a Commercial Finance and Retail industry veteran, recognized by many, as well as his industry peers, for his contributions and creativity in asset-based lendingover the last twenty years. At Salus Capital Partners, Andy serves as President and CEO and is responsible for the overall development and execution of; corporate strategy, business development, leadership and team building. He is charged foremost with creating a unique point of differentiation for Salus in competing across the marketplace, providing guidance and perspective in structuring transactions and above all, for the safety and soundness of the Salus loan portfolio.