Construction companies are ready to stop merely surviving and start growing again. The good news is many lenders are actively seeking new opportunities to put their money to work. When reviewing a credit application, they’re interested in a variety of factors beyond a company’s cash flow and credit history. While every situation is unique, the following 10 tips can help borrowers be more successful when applying for financing.
Reach Out Early
The best time to reach out to a lender is before the company needs capital. Putting time and effort into building a relationship and educating a potential lender about the business prior to applying for a loan can make a big impact. If an executive waits until the company needs money in a hurry, financing options may be limited.
Treat the Lender as a Strategic Supplier
Relationships matter. The company and its lender must work with a set of shared goals. Smart borrowers take the lender’s perspective into account while trying to find two-sided solutions to financing challenges.
Be Transparent
Trust underlies all credit relationships, so be upfront with a lender about any challenges. Don’t allow a lender to invest time and resources into underwriting a loan only to find discrepancies in the information provided. Smart borrowers see financing challenges as opportunities to demonstrate their grasp of the issues facing their businesses and to suggest win-win financing solutions for both parties.
Tell a Compelling Story
Each construction company should tell its story in a way that highlights successes and acknowledges challenges. Create a forward-looking business plan. Organize financials and be sure they align with the story. The presentation doesn’t have to be perfect, but it should be honest and complete. Lenders understand the impact of the downturn on the overall construction industry, but they need to see how the business overcame obstacles and solved problems—and how it plans to move forward.
Get Documents in Order
Every interaction with a potential lender carries a lot of weight. Even if they seem inconsequential, mistakes can cause the lender to lose confidence in a business and its leaders. That’s why it’s important to understand all the key terms in covenants, contracts and credit documents. An executive should be prepared to show specifically how his company will meet its commitments. To facilitate the process, add a cover letter to the business plan including important dates and obligations.
Find a Lender That Understands the Construction Industry
An industry-savvy lender can be an invaluable advisor and an advocate in the credit approval process. A lender with experience in construction will have a better understanding of a reasonable business plan, as well as the challenges companies face. That knowledge will help in structuring a financing solution and maximizing the credit available to the borrower. Work with a lender that understands the industry’s seasonal cash flow and can structure payment plans accordingly. Some lenders are even customizing financial products for the construction industry, such as leases that mitigate excess usage charges while providing rebates on underutilized units.
Communicate
A lack of communication can damage financing prospects. From day-to-day details to big changes, keep the lender informed. If an unexpected event occurs (e.g., a jobsite accident), contact the lender as soon as possible, preferably before it hits the news. Be sure to adequately explain the event and the impact it may have on the company’s ability to meet its financial obligations. Advance warning will build the trust that underpins a productive lending relationship and will allow the lender to be as flexible as possible.
Think Like a Lender
Every construction executive should adopt the mindset of both a borrower and a lender to get the most out of the relationship. Whether the discussion involves a credit line increase or a new competitive challenge, understanding the lender’s thought process and considerations will lead to a more fruitful interaction. For example, the “amend and extend” process can be complex. Smart borrowers have the foresight to contact their lenders 18 months before the loan comes due to make adjustments.
Know Competitors’ Financing Structures
Learn about the financing structures of similar companies in the construction industry. By taking the time to do this homework, borrowers can improve their discussions with lenders while increasing the chances of finding a workable financing solution.
Optimize Cash Flow
A lender needs to understand all monies coming in and out of the business, as well as payment histories. To impress the lender, executives should demonstrate ways they’re trying to increase cash management efficiencies.