While focusing on the pros and cons of debt-versus-equity financing is an excellent starting point, business owners need to make sure that the people behind the financing commitment really understand your business, advises Patrick Ramsier, managing director of commercial lending for ViewPoint Bank of Plano, Texas.
Smart Business spoke with Ramsier about the questions a business owner needs to ask a lender to ensure that the financing process is successful.
What should a business owner evaluate when considering debt or equity?
There are significant differences between debt and equity for both the provider of capital and the business owner to consider. For the business owner, it is generally less risky to do the deal with equity because you will not have fixed debt services associated with the loan. Usually, you can’t provide the equity source with the returns required without layering in some debt. The obvious downside to equity is the cost. Equity will require preferred returns in excess of the rate you will pay on most bank loans and they will expect some ownership in the company and their share of profits. The downside to debt is that too much will suffocate the business. It’s the right blend of debt and equity that will serve you the best.
What are the criteria for selecting either a debt or equity lender?
A business owner needs to take similar steps to ensure success. There are many books written about this topic and how to get your financial ducks in a row, how to write a strong business plan, and how, generally, to ready yourself for either debt or equity financing. The SBA, for example, offers a lot of help on this topic.
But one step that is often overlooked is the criteria for selecting the right lender, which is the key to successful financing.
How can a business owner find the right lender?
While it may be tempting to jump at the first offer that comes your way, it is wise to step back. The process of finding a source of capital is a lot like a job interview. Yes, they are interviewing you, but you must also interview them. For financing to be successful, you and the capital source must have interests aligned, and you both need to know the business intimately.
If neither party knows what they are doing, that is a recipe for failure. If you know what you’re doing and the lender doesn’t, that’s setting yourself up for frustration, because you will spend most of your time educating the lender.
What are some questions to ask the lender to make sure it’s the right fit?
Say you want to expand your afghan manufacturing business. You need to ask, specifically, if the lender has ever financed an afghan manufacturing company before. Short of that, you need to ask if they have ever financed a manufacturing company in the past. It does not have to be exactly the same — same loan amount, exact same business — but close enough so that this lender knows your needs. Past deals, basically, should be in the same ballpark, or they should have the ability to do a pro rata analysis.
What are some specific questions to ask a lender?
- Has your lending institution ever financed businesses like mine — successfully?
- Have you financed within the range of what I’m asking?
- How many of these businesses have you financed?
- Do you consider yourself experienced in financing this type of business?
- Do you think our interests are aligned?
These questions will help you narrow down the choice considerably. When you get several lenders that meet your standards, ask the lender for a list of similar customers that borrowed money from the institution.
When you meet with the customer, ask the following questions:
- Did the lender understand their needs?
- Was the lender flexible and willing to accommodate the business?
- What were some of the negatives during the process?
- What were the positives?
When you further narrow down the capital sources on your list and determine which lender is best prepared to handle your financing, you are well ahead of the game in helping your business obtain financing that is a win-win for you and the lender.
PATRICK RAMSIER is the managing director for commercial lending at ViewPoint Bank, Plano, Tex. Reach Ramsier at (972) 801-5832 or Patrick.firstname.lastname@example.org.