We talk to a lot of companies every week –in fact this year we have seen more than 300! With the complexity of raising a loan through a bank, more and more businesses are looking for alternative sources of finance. If you think you could be one of them, here you can find 5 of the most important topics you should keep in mind to raise your SME loan – from the perspective of a lender.
1. Starting a discussion
We’ve found that the best way to start a discussion to raise your SME loan is to have a quick call with the lender. From there, they will follow up with a more detailed information exchange. This rapid approach gives us enough to give you an initial indication of interest — is this something we can fund, do we know the industry, do we have other companies in our portfolio which compete? By answering all of these questions quickly up-front we are able to move the deal forward efficiently.
2. Information to prepare
A great deal of time delays in our funding process are caused by companies who speak to us despite not having all of the information available we need to assess the business. It’s well worth spending some time prior to speaking to the lender collating the information you’ll need to complete the fundraising, and although the specifics vary between lenders, most of the information needed is very standard and can be collected well in advance.
The most important one to get right is a financial model. The reason this is so important to get right from the start is that it underpins the rationale for raising debt — how much you can borrow and how you will be able to pay it back. It’s also really important that projections and actual numbers match when you’re fundraising. There’s nothing worse than having to re-forecast your budget halfway through a process.
Each lender has its own way of making decisions. Understanding this from the start is important because it will allow you to judge where you are in their decision process and therefore what chances you have of getting a positive decision, as well as the timings you can expect.
For instance, here at BOOST&Co we have two committees: one at the beginning and one at the end. The first allows us as partners to discuss the deal in detail and issue a formal term sheet if we are positive about the opportunity. We usually discuss a deal for about an hour to understand the key risks, to give focus to our due diligence on the most important points of the deal and to come up with a negotiation strategy. Our second committee occurs after all of the due diligence is finished and we are ready to fund the deal. This is to make sure we have addressed everything we wanted to in our due diligence and that we are still excited about the deal progressing.
4. Comparing term sheets
Some companies receive multiple term sheets for financing, invariably of different shapes, prices and amounts — how to best compare them?
Aside from the obvious in that you should always opt for someone who you get along with and who has a long experience of your industry, the best way to compare term sheets is to
(1) be clear on the purpose of the loan and make sure the term sheets allow you to achieve this in full – the amount borrowed must be sufficient to achieve your objective;
(2) compare all of the term sheets on an IRR basis — what is the total cost of the term sheet and when is it incurred?
This is the best way to have a real cost comparison.
5. Loan Sizing
Our years of experience funding SMEs show that the biggest mistake for young SMEs looking for debt is to take a loan that is too large. How to decide what the right size loan is?
The temptation is always to take as much money as possible, even without having a clear immediate need for it, or even a plan as to how to pay it back. Our view is that you should start with something that fits your immediate needs, say for the next 6-9 months. During that time you’ll be able to build up a personal relationship with your lender, show them that you can perform and then ask them for more money if needed. This second process is then much easier because both of you will have the confidence that the relationship and the business is a good one!