A Key Question to Avoid Problematic Lenders and Investors

Part of my job is giving speeches to entrepreneurs and business owners regarding raising capital, executing successful management buyouts, refinancing debt, and corporate financial planning. I pride my firm on enlightening entrepreneurs on capital and financial planning for their business.  I recently gave a speech, and audience members completed surveys afterward. While the responses were generally positive, one attendee wrote that my presentation was too “optimistic” because he had heard horror stories about bad financial partners—especially in private equity.

After reflecting on his comments, I think he had a point. What I left out of my presentation wasn’t the horror stories themselves, but rather how to avoid ending up with a bad financial partner in the first place. The key question I needed to answer was how to avoid doing business with problematic lenders and investors.

My recommendation is simple: when choosing a financing partner ask for specific references.

In particular, ask the financial group to connect you with an owner, company, or client that faced significant challenges and where the investor helped the business navigate through them. For example, ask the financing partner about situations that required short-term concessions on investment terms or repayment schedules. Firms that consistently maintain strong relationships with their portfolio companies and pride themselves on being flexible, supportive partners are usually happy to discuss these experiences.

Another positive sign for a great financing partner is when a firm says, “Our entire portfolio is online, so feel free to choose any company you’d like to speak with, and we’ll arrange the introduction.” By contrast, financial firms that are inflexible—or worse, become opportunistic when circumstances deteriorate—often avoid these conversations. That’s why it’s important to raise the topic yourself.

The best time to request these references is just before signing a proposal or term sheet. By that stage, you’ve identified your preferred partner, but it’s still early enough to walk away if the conversations reveal concerns.

As you discuss the many opportunities you hope to pursue with your new financial partner, make sure to ask this key question. The answer may uncover important considerations that others overlook when optimism alone guides the decision.