Lending & Borrowing - ‘Confidence’ is Earned Not Given…

I recently attended a seminar sponsored by the Turnaround Management Association (TMA) which included panel discussions from financing companies and banks both of which are still heavily discounting tangible assets. Financial institutions use a blend of cash flow and asset equity to determine the lending capacity of a business among other ‘tools’ not covered here. The continued lack of confidence in the valuation of assets (buildings, equipment, inventory and even IP) will continue to constrain the economy well into 2010.

However, confidence with asset valuations is building slowly – moving in the right direction within some markets and industries. Lending all comes down to a lender’s confidence they will be paid back from the borrower in full with interest and on time.  In a truly open market valuations are built overtime and are not generally in anyone’s complete control; however, disruptions will occur and some individuals may attempt to control valuations in the short term.

Business management and owners can control the quality of the message presented to lending institutions which need confidence builders.  Confidence builders begin the lender / borrower relationship; achieving the goal of  both parties - providing captial for funding operations, growth or to finance strategic acquisitions for the borrower while the lender generates fee and interest income.

Key issues mentioned by panel members:

• The lack of preparation in a businesse's own financial projections to 'sell' a bank that a borrower knows their business well enough  to plan - assuming the business management or owner's goal is to have any hope of borrowing money.
• Failing to use realistically, conservative sales estimates and expenses to create financial projections that you would want presented to yourself if the tables were turned.
• No confidence - if a company’s own financial and management team does not have faith or ‘confidence’ in the numbers presented to a financial institution then the effort is wasted.  The lending team will see through a borrower's false effort and they will remember it.
• Companies must believe in their own asset valuations on their balance sheet and have supporting data / documentation to back it all up. A surprising number of companies do not put much time and effort into supporting asset valuations on their own balance sheets or presentation materials.

When management prepares a well thought out presentation to financial entities it will go a long way to achieving the goal of financing business needs. The greater economy and businesses will rebound quickly once confidence is restored which also must be earned.

If a business owner thinks about lending their own hard earned money to another business, especially now, how detailed and through would you want the financial statements and projections to be? How confident of a presentation by a business owner or management would you need to lend your own money?