Drawing on Sam’s experience assessing and structuring funding for New Zealand businesses.
Why has revenue moved? What’s changed in the business since the last set of accounts? What is the funding going to be used for? What does the existing debt position look like? And what gives the business confidence that the opportunity it is funding will produce the expected return?
At Line Capital, asking those questions is part of the credit assessment.
We take a relatively information-rich approach to lending because context can materially change how we understand a funding request. It can affect whether we lend, how much we lend, how the facility is structured and ultimately what the funding costs.
"We try to be as well-informed to make the best outcomes rather than treat it as minimum requirements."
When the numbers don't tell the story
A recent Line Capital application provides a good example.
A trade services business was seeking $250,000. On an initial view, there were some obvious challenges: revenue had been declining and debt servicing sat outside our usual approval threshold.
We could have stopped there.
Instead, we wanted to understand what had been happening inside the business.
The decline coincided with issues involving a former director who had since left the business. There were also operational costs that had been identified and were being removed, improving the position going forward.
That changed the picture.
We were able to consider the operational changes that had already been made, look at forecasts for the business and assess what those changes could mean forservicing. There was also sufficient equity in a property supporting the lending position.
Taken together, that gave us enough confidence to approve the $250,000 facility.
The historical numbers hadn’t changed. Our understanding of what was behind them had.
So, what do we want to understand?
There isn’t one question that unlocks a lending decision.
When we’re talking through an opportunity, we’ll typically want to understand how long the business has been operating, what it turns over and its profitability. We’ll look at the current debt position and ask what the new funding is intended to do.
Then there are questions about where the business is heading.
Is this funding solving a short-term requirement or forming part of a longer-term strategy? Is there an intended exit? Are there related businesses that are relevant to the overall position?
And if something in those conversations raises another question, we’ll follow it.
That last part matters.
Credit assessment shouldn’t simply be a process of collecting enough information to complete a checklist. Sometimes one answer changes the next question you need to ask.
What will the money actually do?
Understanding the purpose of the funding is particularly important.
A request for $100,000 tells us the amount a business wants to borrow. It doesn’t tell us what happens when that $100,000 enters the business.
Is it being used to purchase stock against known demand? Add capacity? Acquire another business? Restructure existing debt? Get through a temporary cashflow gap? Or address a deeper problem within the business?
If the funding is intended to generate additional revenue or profit, we want to understand how.
That means looking at the opportunity itself, but also at the track record of the people executing it. Have they done something similar before? How specific is the plan? How quickly could the investment reasonably translate into revenue and cashflow?
Those answers help us assess the funding in the context of the business rather than treating the loan amount as a number in isolation.
“What are they actually going to do with that money? What’s their track record on putting debt to use to generate profit?”
The people behind the numbers
This is also why we place value on understanding the people running the business.
For larger or less straightforward funding requests in particular, someone’s background, experience and track record can add useful information to the assessment.
How did they get to where they are today? What experience did they have before starting the business? How have they responded when things haven’t gone to plan? Have they successfully put borrowed capital to work before?
None of that replaces the financial assessment.
But businesses are run by people, and their ability to make decisions, respond to changing conditions and execute a plan can be relevant to the risk we’re being asked to take.
More information can change the lending outcome
Greater context can give us confidence in an application that may have been difficult to understand from the financials alone.
The trade services business is one example. The initial numbers raised questions, but understanding what had happened in the business, the changes already made and the position going forward gave us a different basis on which to assess the request.
Additional information can also influence the term, structure and pricing of funding because it gives us a better understanding of the risk.
But more context doesn’t always result in more funding.
Sam gives the example of a business requesting $100,000 where, after assessing its operations and financial position, Line Capital might determine that $60,000 or $70,000 is a more appropriate amount.
That isn’t necessarily the outcome the borrower initially asked for. But the purpose of the assessment isn’t simply to find a way to approve the requested number.
It’s to reach a considered lending position based on what we believe the business can sustain.
Better questions. Better-informed decisions.
Line Capital’s approach is to be as well-informed as possible when making a lending decision, rather than treating the information gathered as a set of minimum requirements.
That means there can be more questions.
But those questions aren’t there to create process for the sake of process. They’re there because the answers can change the assessment.
Sometimes they uncover a risk that wasn’t immediately apparent. Sometimes they provide context for a set of numbers that initially looked difficult. Sometimes they lead to a different funding amount or structure.
And sometimes they give us the confidence to say yes to a $250,000 funding request that might have looked very different if we’d stopped at the first set of numbers.
That’s what better questions can do.
Have a business funding opportunity that needs a closer look?
Talk to Line Capital about the business, the numbers and what sits behind them.
