10 Things to Look For in a Lender

1. How long has the lender been in business?
2. What is the lender's reputation?
   
3. How much experience do they have in your profession or line of business?
   
4. Is the lender offering realistic terms and a reasonable payout?
   
5. Does the proposed structure of the loan match your cash flow considerations?
   
6. Where applicable, can working capital and closing costs be included in the loan?
   
7. Will the lender flex to fit your needs, or will terms be force-fit to your situation?
   
8. Does your lender hold on to most of the loans they originate, or do they have a history of jumping in and out of the market?
   
9. Will your lender monitor the marketplace and be proactive in recommending appropriate responses to you?
   
10. Remember to pick a lender as your first choice rather than a last resort.

What to look for in a lender in today's business environment?

Business is strong. Prospects are promising. But, you are going to need cash to grow your business. Cash for equipment, construction and expansion.

You have a good idea of what a lender will be looking for from you. Have you given serious thought, however, to what you should be looking for in a lender?

First of all, there are more sources and types of financial instruments available than ever before. In addition to traditional banks and other "brick and mortar" financial service organizations, there are Internet-based lenders trying to entice you to their sites. Wall Street has also jumped into the fray with mortgage-backed securities and other varieties of collateralized loans. In many cases, this heightened level of competition has resulted in capital being offered at what appears to be extremely attractive rates. Before you jump at an offer that seems too good to be true, remember the wisdom contained in that time-honored expression.

The key is to look beyond the rate. Will the organization you are doing business with be around when you really need them? The ups and downs of the financial markets, for example, can lead to dramatic swings in the availability of capital. In the case of "dot com" based lenders, can you count on them being around from one year to the next?

And where do you turn for customer service in the increasingly common event that your lender packages your loan with thousands of others and sells off their portfolio because of short-term business considerations?

The second issue is the reputation of the lender. How long have they been in business? Have they demonstrated stability and a true commitment to your business or professional category over the long term?

If the prospective lender has a lengthy track record, it's an indication that they structure deals that are fair to both lender and borrower. Otherwise, they risk losing you as a client. While rates are certainly important, this "big picture" perspective puts more emphasis on all stages of the process, from the application through ongoing service once the loan is in place. This type of balanced approach gives you the opportunity to pick a lender as your first choice, rather than as a last resort. A strong relationship minimizes the chance that you will be dealing with a "hit and run" lender interested in making a short-term killing at your expense.

Experience is the next most important criterion to consider. You probably don't have the time or inclination to teach a lender your business so they can do a better job of addressing your needs. A warning flag should go up if the lender seems to be filling in the blanks of a highly structured scoring process that seems bent on making "one size fit all."

Intimate knowledge of your business category, and of the local or regional economy can make a huge difference.

A knowledgeable lender provides value-added services long after the initial transaction by monitoring changes in the marketplace that effect risk, and pro-actively recommends appropriate responses to you. In reality, this type of lender is adding to its knowledge base on your behalf every business day.

Does the lender offer realistic terms and a reasonable payout? Some lenders might try to force a shorter term on you than is warranted by the nature of your business or the type of equipment. A lender that knows your business is familiar with the quality of the manufacturers you are considering and may adjust the terms accordingly. A strong market for used equipment might enable you to trade up, or to stretch your available dollars by purchasing well-maintained used equipment that has a substantial amount of service life remaining.

Where appropriate, some lenders may be willing to reduce or eliminate prepayment penalties. Or, you may be able to " trade off" the inclusion of prepayment penalties designed to amortize the lender's up-front processing costs for lower monthly payments during the first three years of the loan.

Your lender should be willing to work with you in structuring the loan to match your cash flow. If there are seasonal variations, like weather-related downtime for equipment in the heavy construction industry . . . or a pre-holiday spike in expenses to build inventory . . . will your lender consider a "skip payment" or "flex rate" repayment schedule?

The best lenders will work with their clients to include working capital, where appropriate, as a part of the deal. The key is building a financial plan designed to meet your needs, one that won't saddle you with unnecessary pressure or unreasonable demands.

If the lender can't advance an adequate proportion of the funds that you need for a particular type of equipment, ask whether they will consider additional collateral in evaluating the loan application.

Consider the lender's ability to be flexible in their approach to your business. Don't allow the lender to force-fit their terms to your situation. Are they able to consider financing the acquisition of an entire company, including any real estate involved in the deal? That can allow payments to be extended for periods up to 25 years – resulting in substantially lower monthly payments. A recent real-world example: The new owner of an insurance agency was able to qualify for a 16-year term for her acquisition loan, as opposed to a typical 7-10 year time frame, because the financing blended the cost of the real estate with the cost of purchasing the business. This resulted in dramatically lower monthly payments during the critical first three years of the deal.

Finally, borrowers as well as lenders have to recognize that the financial mechanics of the lending business have changed dramatically over the past five to ten years.

The financial markets spend much of their time focused on the packaging and reselling of loan portfolios.

This shift of emphasis to the "art of the deal" means lower margins for the lender and higher fees and expenses for both parties in the transaction. By stepping up the competitive nature of the business, lenders have left themselves far less margin for error. That reality means it is more important than ever to look for a lender that has developed a sound business formula and demonstrated a strong track record in your field. You want a lending partner with a solid game plan who will be there for you in the long run.

When it comes to financing your business, you don't want to choose "the flavor of the month." You want a deal that will look just as sweet down the road as it did the day you signed on the dotted line.

*Information courtesy of CIT Small Business Lending (www.smallbizlending.com)

Return to BizBuySell Lending Center