How do you persuade a direct lending fund to give you finance? Jon Herbert, managing director of direct lender Beechbrook Capital’s UK SME Credit Fund, has a check-list of tips for would-be borrowers

Direct lenders are credit funds that provide loans to businesses. The direct lending industry has grown in the last decade as a replacement for bank lending. There are now numerous direct lending funds, with different products, targeting different types of company in different lending situations.

So why should you contemplate approaching a direct lender rather than a traditional bank? There are a number of reasons but the key one is that banks tend to focus on the security a company can provide. They like assets. And they are not usually keen to commit for the longer term. By contrast, direct lenders think more like investors. They are more interested in the revenue, profits and cash your business can generate than the security it can provide. Asset-light but profitable businesses may not find what they want from a bank but will often get a hearing from a direct lender.

This difference in outlook should be kept in mind when preparing an approach for finance. So what are the do’s and don’ts?

Tips for approaching a direct lender

At the outset, do your research. Ask yourself: are you approaching the right types of lender? Think about the size of loan you require, the purpose of the loan, the size of your company and the sector it is in. Is there a good fit?

Make sure you know your business inside out. The lender is backing your judgement of the future and the opportunities it presents for the business. Show real enthusiasm for your business and a keenness to explain what makes the business tick. If the lender concludes that you do not understand the strengths and weaknesses of your business it is unlikely to lend. Own up to areas that need improvement.

Prepare a document that introduces your business and explains its operations, its products, its markets, its customers, its recent performance and your plan for the next three years.

Show that you maintain high-quality financial records and that you can present the key metrics you use to measure performance. Show that you know the drivers of profit and cash flow.

Articulate clearly why you need the loan. The purpose needs to support your plan for the business.

Communicate openly and honestly. Always assume that the recipient of the information has been trained to look for inconsistencies in your story and numbers. Respond to requests for additional information in a timely manner. The discipline you bring to handling the application process will speak volumes as to how your interaction with the lender is likely to be managed after the loan is granted.

View your interaction with the lender as the start of a business partnership. Satisfy yourself that you really want to deal with the lender over the medium term. Make sure the lender is a good fit for your business. Ask to see details of prior loans and ask for other businesses that can provide you with references.

Finally, be prepared to help the lender check out your story. Are there reference materials on the market to back up the business plan and customers the lender can contact in order to reference your products and services?  

If you make life easier for the lender there is every chance that the lender will go the extra mile for you.