How to Choose a Lender
Happy Thursday morning. You know what time it is?! That’s right — it’s INTRO to Finance time! I’m Jason and we’re back with another entry in our founder’s field guide to finance. The question we’re answering this week is:
“How do I choose a lender?”
Last month, we helped thousands of founders navigate PPP loans and helped hundreds secure funding through our partners. If you were following along, yes, the headlines about it being a mess were true. Banks tasked with deploying the funds showed outsized favor to their current, favorite, or prospective clients.
Those who didn’t have an existing relationship with a bank in the program or hadn’t invested time in building a network of prospective financial partners found themselves scrambling to find a lender. Or worse, they were left on the sidelines altogether.
The Value of Getting It Right
Having the right capital provider relationship for your business can be a huge competitive advantage for your company when facing headwinds or tailwinds. That’s not even mentioning the better quality of life for the founders.
Explaining yourself and your business to keep your financial partner happy can be distracting. A trusted relationship with your funding partner allows you to focus on your customers and moving your business forward.
There are a lot of founder horror stories — whether it’s being fired by your board or a lender hastily asking you to repay their loan. The best way to avoid a similar fate is to have the right financial relationships.
Here’s a quick checklist for sizing up any prospective financial partner:
— Evaluate fit with your business.
— Build the relationship early.
— Run a process.
Are We Good Together?
Despite all of the marketing that financiers do, there’s no one-stop-shop for financing. Each financier has its focuses and strengths. So much time is wasted talking to firms that were never a fit from the start. Making sure you fit their funding profile will save you a lot of time and disappointment.
One of the best ways to start assessing if you’re a good fit for each other is to see how much they understand your business. If you’re having to teach your prospective financing partner what SaaS means or what digitally native brands are, you’re likely in for a frustrating relationship. The more your partner understands how your business works, the more you’ll be able to navigate challenges together.
You’ll find that a lender that deeply understands your business can add value in unexpected ways. If they have a large portfolio of similar companies, they can often provide insights based on what they see in the broader ecosystem. Insights and pattern recognition aren’t exclusive to VCs.
As the financial decision-maker in your company, it’s your job to assess whether the financier is good for your business or not. If your partner understands you, it’s likely that they are able to creatively approach the funding of your business to match how you operate.
Get to Know Each Other
As with any good fundraise, debt or equity, the best way to build relationships is long before they’re needed. The longer you’ve known each other, the more you’ll understand what each partner is about. Without the pressure of fundraising, you can both think clearly about what a partnership might look like. This will also give you a chance to see how people react or behave over time.
If you’re building a one-on-one relationship with someone at a firm, this gives the financier a chance to get comfortable with how you make decisions in your business. You can ask for their opinion to see if you’ll align.
If you think the perfect partnership means not speaking to a human at all, there are plenty of financing firms out there for you. But knowing your partner is still critical. It’s a different kind of relationship-building, but you can get to know how they work and what they look for by following them on social media. Although less personal, you can still get to know their views and formulate an opinion on if they’d be a good partner or not. Getting to know a partner doesn’t require painfully long lunches or never-ending Zoom calls. Promise.
Whether it’s online or offline, cultivating a network of financiers and staying in contact can increase the quality of funding options when you need them. We’re trying to make this network easier to build with INTRO. If you’re struggling to start or would like help building out that network, email me at jason@indie.vc.
It Takes Two
Just because you’ve built relationships with potential partners, that doesn’t mean you shouldn’t carefully evaluate options when you need them. Any good partner will be willing to compete for your business.
Here are some basics for choosing your lender:
Know the answers to questions like:
Why do you need capital?
How much capital do you need?
What kind of debt would you prefer?
Seek multiple options.
Make reference calls.
These will speed up the process and make sure there’s clear communication between both parties. They’re important for getting a great partner for your company. Having multiple options increases competition and can provide better terms.
It can also expose who is thoroughly thinking through the financing. These competitive processes open a deeper conversation on why things are structured in a certain way. You may find that the higher-cost option has a more thought-out approach, which may provide you more comfort in working with someone who deeply understands your business. The lowest rate doesn’t always mean the best partner. Sometimes, you get what you pay for.
The most overlooked part of a process is the reference calls, but it might be the most important. You’ll feel awkward interrogating someone who knows the partner under consideration and you might be nervous that they won’t be honest with their feedback. You’d be surprised.
Most founders want to help others find success in their entrepreneurial journey. Besides, have you ever known a founder to pass up an opportunity to complain about a capital provider? The importance of confidence in a partnership far outweighs the awkwardness of a discussion.
Additionally — ask your network before asking the financier for references. If you can’t find references, reach out and we’ll try to help where we can.
A few reference questions to consider for your call:
— What has it been like to work with the partner?
— Have you had to work through any issues together?
— Have you had to renegotiate any parts of your deal?
— Have you had to work through any covenant problems?
— What was the legal process like?
— Have there been any surprises in the relationship?
— How involved are they?
— Do you feel like they are supportive of the business?
A well-thought-out process to search for a lender can reveal things about the partner that you probably missed in your earlier, friendly conversations.
There is No Finish Line
In the great PPP rush of 2020, we saw companies scrambling to find any lender that would take them and seemingly formed new relationships overnight. This was a unique moment in history. In the normal course of business, creating partnerships and relationships with little to no diligence can be a cost you’ll find yourself paying far beyond the money at risk.
As with any partnership, the key is finding someone that understands your goals and can be relied on in good times and bad. Start building these relationships before you need them and find ways to test them along the way.
Unlike equity’s sequential funding rounds, lenders can start small and grow with you over time. Imagine your VC leading each subsequent round. The relationship with a lender doesn’t need to end with your final payment. The right lending partner wants you to grow and will want to grow their business with yours as you find success together.
