Enduring Worth of Lender-Borrower Relationships — Why Lowest Price Isn’t Always Best Value
CIT’s Jon Lucas provides insights into why a good lender-borrower relationship is tantamount to ensuring the longevity of a partnership that is rooted on the proposition that a lender may not always have the lowest price but can be counted on to stand by the side of the borrower over the long term.
When you’re shopping for a new home, vehicle or other big-ticket item, it makes a lot of sense to use price as a primary basis for comparing two products that are generally alike. But when it comes to shopping for a loan, lease or other financial product, business borrowers tend to apply the same formula, often to their detriment.
There are significant differences between lenders and what they provide for your money. On one end of the spectrum are those that may charge the lowest rate but make up for it by doing a great many transactions and offering minimal support after each loan closes. On the other end are full-service lenders who may not always have the lowest price but will stay by your side and work with you to ensure your business succeeds over the long term. In particular, you want to be sure your lender has the structuring expertise, service focus, and finance and industry knowledge that will bring your relationship to the next level and help your business grow.
I’ve been in this business for many years, but I’m still surprised by how many business owners don’t always look at the full picture when picking a lender. In fact, the tendency to shop by price seems to have accelerated in recent years as corporate cash stockpiles climbed and lenders competed to put a surplus of liquidity to work. Pricing may still be tighter in the multibillion-dollar corporate marketplace, but the fact remains that middle-market companies have plenty of financing alternatives.
Before you sign on the dotted line with the cheapest financing alternative, you would be wise to remember that old maxim: “You get what you pay for.” The value of any business financing solution extends only to the support the lender on the other side of the desk is willing and able to provide. You want a lender who is going to help you manage your business as efficiently as possible, anticipate potential problems before they become crises and build a profitable and successful business. You should consider a business relationship, not a one-off transaction with a lender.
Let me walk you through how that increased value translates into each of our lending relationships at CIT. Our clients see that value shines through in three distinct ways: knowledge, structure and service.
When we initiate a loan or other financial support, we want to know that we’re backing a winning business plan. That’s why we have invested in teams that know our clients’ industry segments inside and out. Internally, we have very high expectations for each team member involved in any financing decision. They need to know not only the client’s business, but the broader industry trends as well.
This deep knowledge base doesn’t just help our company make better financing decisions — it helps our clients prosper. Although we are not our clients’ financial advisor in a formal sense, every year we review our clients’ business plans with an eye toward helping them manage their business better. We look at their cash flow projections, the amount of risk they are taking and the degree of diversification in their customer base. We examine their product sourcing strategy and the cost implications of potential sourcing changes. We consider where they are in their business lifecycle and whether they need funds to grow or to maintain their current trajectory.
Putting our knowledge to work for our clients in this way places them in a position to succeed. Often companies selling into retail channels are not focused on details such as cash collection and customer credit underwriting because they are paying attention to their individual strengths, whether it’s designing, marketing, selling or staying on top of the latest consumer trends. It should be of little surprise that behind every powerhouse clothes designer, furniture manufacturer or housewares wholesaler is an experienced lender who helped them execute a strong financial strategy while remaining focused on building their brand.
Your lender’s expertise should extend to the relationships they have established in your industry. When it comes to our legal, accounting or other professional service providers, we demand the same depth of industry knowledge from them that we cultivate ourselves. It is much harder for an entrepreneurial company to consistently obtain that level of industry knowledge across its advisor base when it doesn’t have a lender that can help make these crucial connections.
Our relationships also yield potential opportunities when we team our clients with one another. For instance, one apparel manufacturer we work with decided to break into the footwear business. We put the company in touch with a footwear manufacturer to explore a licensing business venture. That speaks to the power of relationships, and it speaks to the value your lender should be able to deliver for you.
Growing consumer product companies are generally in need of additional capital to support their development. On the surface, this does not always make them attractive clients. But a lender who has a deep knowledge base in a particular industry can structure their financing support in a variety of ways.
One of the key reasons CIT is able to support smaller, growing consumer products companies is that we can blend financing solutions to match our clients’ needs. We often combine our factoring and lending products to help our clients get started and continue to invest in their business while they wait to be paid by their retail partners.
For instance, we work with plenty of goods makers with seasonal sales, and these vendors need to build their inventory well in advance of the annual spike in orders from retailers. We may provide advances beyond their collateral or extend an additional loan where many other lenders won’t, and that’s because we understand their business and the risks involved. We may even extend financing tied to their intellectual property, an attractive alternative we’ve offered for decades.
In many of our relationships, we are also providing receivables management services for our clients, so we have our finger on the pulse of what’s happening with their business. This puts us in a great spot to help identify issues such as dilution, which is the short-paying of invoices.
No two companies are alike each has specific needs at every step in their development. These needs inform the way financing packages should be designed to support their growth.
When two longstanding clothing manufacturers we work with recently combined, the acquiring company needed flexibility in the deal’s financing terms. CIT’s Commercial Services, Commercial and Industrial, and Capital Markets teams leveraged their collected retail and lending expertise to structure a term loan and repayment plan that fit those needs. Our Capital Markets relationships also put us in a position to bring in investors that had confidence in our judgment of the combined company’s prospects.
Long lead times are a staple of most retail-based business models. You have to plan and ship weeks, if not months, in advance, which puts a premium on responsiveness when it comes to your outside relationships. When your lender isn’t responsive, it puts you at risk of putting goods to work with a buyer who isn’t creditworthy, failing to recognize the reason behind short paying or missing hints that a customer is starting to fall behind.
You need to know that when you call your lender, someone is going to act, not in a week’s time or at the end of the week — but immediately. You should have constant access to real-time information that tells you which customers have paid and which haven’t, as well as a quick turnaround when new customers are applying for credit.
At CIT, we have a dedicated receivables processing facility in Virginia staffed with 170 employees who are available around the clock to support client requests. Our customer credit department has access to credit files on a wide array of companies so they can produce instant approvals, and they help manage open invoices for more than 75,000 customers. If the lender you’re talking to doesn’t offer that kind of coverage and support, you would be wise to keep looking.
Upping Your Game
Many consumer products companies are doing a better job these days of managing just about every aspect of their business, from inventory control to pricing strategies to cash flow management to collections. More often than not, behind each of those success stories is a knowledgeable lender who is dedicated to making the business perform better and realize its full potential.
A lender who is focused only on winning your business today will always be tempted to simply throw out a low price proposal in hopes of getting your attention. But the lenders you want are the ones who want a relationship. They are constantly investing in the knowledge and the capabilities to guide you through the inevitable ups and downs along the way. That’s where the true value comes in — knowing that someone is always right there with you, looking out for your best interests. Believe me — it’s hard to put a price on that.
Jon Lucas is president of CIT Commercial Services, one of the nation’s largest providers of factoring, credit protection and accounts receivable management services. Lucas has spent his career developing financing solutions for companies in all stages of the business cycle. Prior to his current position, Lucas held various positions including chief sales officer, regional manager and sales manager. To read more about the factoring and financing services CIT offers to consumer product companies, visit cit.com/commercialservices.