While there are numerous reasons and opportunities to be looking for a new lender, in our world the need generally arises from one of two situations:
- A company has been underperforming and the incumbent lender says — or suggests — they want the company out.
- The business has been performing better than projected and would like better pricing, terms and structure, or maybe even a release of a guarantee.
The dynamics shift dramatically depending on whether the first or second situation applies. Let’s assess each of these situations both from the lenders’ and borrowers’ point of view.
A company needs to be prepared to tell new prospective lenders the story, outline a plan to return to profitability and prosperity, including how the business is going to get there and how long it will take, and prepare a “closing the gap analysis” and profit analysis. This gives the prospective lender a road map and performance guide that can be used when presenting the credit to their committee.
In addition, a company should have projections and assumptions ready and be able to articulate the company’s position and needs — the more detail the better — which shows great thought and preparation. Those expectations need to be appropriate. It is dangerous to over value the company’s situation or not know how much time is available. Knowing the lender’s pressure points and considerations is necessary as well.
To deterime these factors, a company should do some homework to avoid wasting a lender’s time, including determining which lenders are looking to do the tougher deals, what the parameters are and what kind of pricing and structuring the lenders are seeking. In developing and considering a new relationship, the most important starting point is that a proposal is a win-win. Start with the hope of making the relationship work for the long term. Looking for a short-term relationship is usually a very expensive proposition.
New Lender or Investor Perspective:
To paraphrase two of the most legendary investors of our generation, Warren Buffet and Carl Icahn, the best time to run toward something is when people are running away from it. Similarly, when people are rushing toward something, it’s probably time to head for the hills.
In a climate where there are not enough good deals, and most of those deals are being chased by competitors, a lender or investor must be willing to look and consider where others are not. Tougher deals may require more work, but with that comes potentially more reward such as better pricing and fee opportunities.
Another question to ask: Is there an opportunity for warrants as part of the financing efforts? While this certainly borders on the non-traditional, more and more owners are willing to consider it as part of a financing package. This certainly demonstrates a willingness to think outside the box and redefines the partnership.
While air-ball loans are becoming more prevalent, it is critically important to assess the character of the borrower in this case and to do a substantial amount of investigating. While flexing on pricing is certainly understandable, once the lender begins flexing on the structure it can create a very slippery slope. Companies are usually in a situation for a particular reason; it doesn’t happen by accident. When a lender is in air–ball loan territory, exiting is not just a function of hard collateral, but of intangible collateral as well.
The Other Side of the Coin
Building a portfolio is often a process of adding and subtracting. As a new loan closing is celebrated, a competitor takes another client by offering better pricing. The key is to have companies that are experiencing organic growth.
Company’s Point of View:
It has been an outstanding year. The company is experiencing organic growth, revenue and profits are better than forecasted and the entire business is performing better than projected. The company would like better pricing, terms and structure, maybe even a release of a guarantee.
The best time to ask is when there is no immediate need, especially during the summer. Generally, business and prospecting is a bit soft during this season, so lenders and investors have a bit more time to focus on a company’s request. If private equity is a consideration, there is no better time to ask than when an equity firm has closed on a new fund and has money to invest. Thorough research and preparation is always important.
A company should perform its own self-assessment and review. Have a meeting with the company’s financier and understand the lender’s outlook. How well is the company positioned in its lender’s portfolio? Is the lender still really interested in the company?
More importantly, is the lender prepared to support the company’s growth? I have a client with a significant concentration issue that would have dissuaded a number of institutions. We found a lender with a creative approach, including certain levels of credit insurance, to work through the concentration concerns. Another client had a product recall and the lender group worked with great patience to support this family-owned company through a short-term blip. It is important to know if a lender is the right partner.
Lender’s Point of View:
Everybody likes to have contact with the decision maker, and for some that touch point is the most critical. To my clients — and a large number of business owners — having access to the decision maker usually outweighs pricing differences. For accounts that are really of interest, it is critical to have a senior level officer visit the prospect. I can’t tell you how many times this was the determining factor when a client selected a lender.
Flexibility plays a critical role as does an institution’s reputation in the marketplace. This could be the difference in closing the deal or losing an opportunity. Take a look at lost deals, and reach out to these former customers and prospects. Post mortem analysis always provides great insight. While self-assessment is very tough, it is also critical to long-term success.Everyone’s money is green, so being creative on structure, collateral, the brand, patents and trademarks, cash flows and approach can make all the difference in the world. However, lenders should always remain circumspect.
Will the borrower be allowed to use some of the proceeds for a dividend recapitalization? This could also be a differentiating factor. Having this type of conversation provides perspective and insight into what the management team is thinking. Few things could be more powerful for a lender than understanding and hearing what the person or company plans to do with the proceeds.
Make a Difference
Being a difference maker early in the relationship can lay the foundation and translate into long-term and profitable opportunities. In 2008, when the financial world was falling apart, a client owned a manufacturing/distribution operation as well as retail stores. The manufacturing business was always profitable while the retail stores were underperforming at best. Among other reasons, opening retail operations in 2008 could not have been worse timing.
The incumbent lender was going through its own issues and wanted out of this credit. We found new lenders Michael Sharkey and Ron Kerdasha of Cole Taylor Business Capital, now MB Business Capital. Cole Taylor was looking for clients with a good foundation, good collateral and a credible management team who knew their industry.
Today, five years since the lending relationship began, the company is achieving record sales, the lending facility has increased, the customer base and products have diversified, the lender has been supporting the company’s growth and the management team is very proactive. Acquisition opportunities are being considered, and MB Business Capital made the difference. At the end of the day, creativity and flexibility are still the keys to success.
Record amounts of capital are in the market looking for opportunities with no signs of abatement any time soon. Also, substantial rate increases are not on the short-term horizon, so differentiation is critical. To lead the pack, companies and lenders must be creative and take a different approach.