In DWM’s second story in a series regarding security equity capital, today Mike Collins, partner at Building Industry Partners, explains how to prepare for conversations with capital providers.

Senior lenders fill a critical role in funding small companies, says Collins, while providing the cheapest form of capital.

“Despite some hoops, it is also typically the easiest form of capital to access,” he says. “Being the cheapest form of capital means that lenders earn the lowest return on their capital versus venture capital, mezzanine debt or equity. Thus, lenders are required to be the most risk averse investors in order to safeguard their capital.”

He adds that the secret to a good lending relationship is to be the source of good news and to return the bank’s capital to them over time.

So what do banks want to see in borrowers? Monthly financial statements is key, says Collins. “Preparing quarterly statements is no longer sufficient for lenders.”

Banks are also looking for perpetual inventory, he says.

“Since banks are loaning against inventory, they do not want to see companies operating with an estimated inventory,” he says. “Annual or semi-annual true-ups are not enough.”

Door and window companies may want to look to ERP type system that is fully integrated from order entry to fulfillment to accounting, he advises. This offers the ability to prepare a host of financial analyses quickly.

“If a company comes close to violating a loan covenant with the bank, this ability to provide timely information becomes even more critical,” he says.

When preparing an introductory packet for a bank, Collins says there are some critical items that must be included, and unfortunately these are items often forgotten.

–Financial projections (prepared at an 80 percent confidence interval);

–Full historical financial results (balance sheet, cash flow statement, accounts payable and receivable aging reports, etc.);

–Business overview and history;

–Detailed description of products and product categories;

–Description of and trends driving demand in the market served;

–Strategies for growth (current and to be implemented);

–Three to five key differentiators versus competition;

–Customer longevity; and

–Customer diversification (no large make-or-break customers).

Other key areas to cover include the following:

–Description of the sales process and cash collection cycle;

–Types of customers served;

–Geographic area served;

–Biographies of the management team;

–Corporate ownership and structure; and

–Competition (too many capital seekers try to position themselves as not having any or very much competition).

Look to future DWM e-newsletters for more on this topic, including mistakes and misconceptions to avoid when going through the lending process.

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