Business Borrowing – Braking & Accelerating

business borrowing speedThe Formula One Story

According to the Highway Code the braking distance for a car travelling on a dry road at 60mph is 55 metres. An F1 car can come to a complete stop in under 13 metres. If travelling at 120 mph then an F1 car can come to a complete stop inside 2.6 seconds.

The point is that performance in a sport based around speed is not necessarily about going faster but is in how that speed is managed. Travelling at top speed for a longer period and controlling that speed provides a faster race time.

In a sport focused on speed there is a much larger focus on stopping than accelerating.

When I look at companies seeking to raise finance I often find that the focus is all about performance and speed whereas the lender is more interested in how quickly the business can brake, then accelerate again afterwards.

Acceleration vs Braking

When it comes to businesses applying for finance there is a general willingness to show how quickly it can grow, how easily it can expand, the potential profits, cash flow etc. All the good things that most businesses think the lender wants to hear.

Sorry to sound dour and downbeat but most lenders are more interested in things going wrong than going right.

If acceleration is about the positive aspects and growth potential than braking is about the what-if scenarios and the contingency plans.

Let me give you a few examples.

Income & Growth

The company looking to borrow explains where their income comes from, how the income will grow and provides a summary of some of their best clients. This is all great as it shows a proven track record, an ability to deliver and demonstrates where the future income is coming from.

The lender would like to know things such as;

  • How long each client has been with you
  • What reliance you have on any one client
  • How easily you could replace a client or what barriers there are to that client leaving you for a competitor
  • If you lost a key client could you adapt, reduce costs and then seek to replace the client with another

It is akin to the business in question demonstrating how they accelerate without demonstrating how they can efficiently brake into an upcoming corner.

Development Finance

A property developer has found a property which requires a degree of work which they can undertake and will then sell the same property for a handsome profit. The developer shows the work they have done previously, shows comparable properties in the area and shows a demand for the property to local buyers.

The developer has pretty much everything covered.

A lender will take each point in question and apply a what-if to each article. They want options during the development and at the end, they are after answers to things like;

  • Can you finance any overruns or unexpected costs. Could the project be adapted without impacting hugely on the sale price
  • What happens if you cannot sell the property. Could you remortgage and let out? Would the figures stack up
  • Is the project dependent on any third party, be it the weather, local authority or other party. What contingencies are in place to cover these items

Again, the lender is looking at the ability of the developer to brake, adapt and accelerate again.

The ability to brake and showing that ability is something commonly missed by many borrowers. It is one of those things that doesn’t sit easily with any entrepreneur as the mindset of a lender and entrepreneur are generally at different ends of the spectrum.

Summary

We will help our clients show how they can brake then demonstrate this to the lender. It is just one way that we get better results for our clients and constantly achieve lender approvals where others have failed.

Remember, accelerating and braking are a requirement of each other. To achieve one requires the other.

By Dave Farmer

Lime Consultancy are a specialist commercial finance broker. For any questions please contact us on 01293 541333, add your comments or use the form below.

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