What the bank requires in return is near certainty that they will be repaid their principal (the amount they are lending you) and interest (the cost of debt). This allows you to put in less of your own money for the same project return, which actually increases your equity return. While I won’t explain the finance principles here, understanding why debt is useful, both from a leverage and interest deductibility viewpoint, is critical to maximising your returns on any deal. This might range from buying a rental flat to buying a manufacturing facility. Gearing also frees up your equity to invest in other deals and diversify your portfolio.
While a bank will require extensive documentation, this, for an entrepreneur, is not necessarily a bad thing. An entrepreneur, by nature, will need to focus on multiple deals and opportunities, and may not always focus on the detail a bank would require. By making this information mandatory, the entrepreneur is required to focus their attention on the minutia, every small detail that makes a deal tick. This level of understanding equips the entrepreneur with the ability to negotiate on the things that really matter and relent on the things that don’t really affect their returns. It also forces the entrepreneur to be organised and methodical.
As Jocko Willink says, with Discipline comes Freedom, and in finance focus on the detail means a greater understanding of the bigger picture. An entrepreneur needs even a basic understanding of finance and the ability to model their deals. That said, most entrepeneurs will simply need debt in order to accomplish their deals – they may not have enough equity or it will be invested elsewhere. A good bank should also become a trusted partner, advising you deal structuring and warning you about potential pitfalls and risks. Forming this partnership will serve every entrepreneur well!
Good luck and happy financial modelling!