Every industry has its own business cycle. Retailers, for instance, have an intense buying season. Others such as metals, have pricing and volume tied to the demand of cyclical automotive and construction end markets. Whatever the industry, however, a company is best served by a lender that knows the business deeply — one that can properly value assets, is comfortable with the peaks and valleys of the business cycle and understands the company’s business model, as well as its competitive position within its industry. A lender with this domain expertise can be a long-term strategic partner that helps a company to grow over time.
Nowhere is this expertise more crucial than for the thousands of middle-market companies. These companies have between $10 million and $1 billion in revenues and many are looking to grow, which requires financing and investment. Unfortunately, many middle-market companies are hamstrung by lenders that may not understand their business and as a result have inadequate or less than optimal financing.
By seeking out lenders that understand their business, middle-market companies have a much better chance of securing the financing they desire. A lender’s domain expertise translates into at least six clear advantages for companies: improved cycle time, liquidity, flexibility, innovation, patience and counsel. Companies looking to establish a long-term, strategic relationship with a lender and not merely a transactional one should consider all six when vetting candidates.
Cycle time is the time it takes for a lender to complete a financing transaction, from the initial request, to negotiating the terms, to securing necessary documentation, to the closing and funding. A lender with a deep understanding of the industry can compress this cycle time and deliver funds faster.
This is critical in today’s fast-paced environment. A responsive lender that can “get up the learning curve quickly” makes a company more nimble and quick to take advantage of time-sensitive opportunities.
A lender that understands the business can make smarter, more confident valuations of a company’s assets and is likely to extend more credit. Conversely, the less a lender understands an industry, the less it’s usually willing to lend against the collateral. The bottom line for a company is straightforward: knowledgeable valuation of its assets means more liquidity, which is vital for ongoing operations and to grow the business.
There is always a complicated balancing act between interest rates, the appraisal of assets, how much financing will be extended and the flexibility of terms. Some lenders — particularly those unfamiliar with an industry — are likely to be very rigid in their underwriting and attach covenants such as a maximum leverage ratio or a minimum interest coverage ratio for protection. Other lenders more familiar with a company and its industry may be willing to offer “covenant-lite” loans that give borrowers more freedom to incur additional debt, pay dividends, make acquisitions and repay junior debt for example.
Many middle-market businesses consider continuous innovation vital to compete with larger businesses. According to a recent survey by GE Capital and The Ohio State University of more than 2,000 chief executive officers and chief financial officers, 54% of the fastest growing middle-market companies invest in innovation and new product development. Besides research and development, these companies are looking for innovation in the structure of their loans. Lenders with domain expertise have the insight to develop innovative, alternative solutions to leverage balance sheets.
Borrowers also need patient lenders. By understanding the industry’s business cycle, specialty lenders are more willing to stick with the company during economic downturns and other macroeconomic factors that can hurt performance in the short term. The last thing a borrower needs is a lender threatening to pull a line of credit at the first bump in the road.
A lender with broad industry-wide knowledge can draw on its expertise to help companies craft and execute strategies in many areas, such as talent management and Lean Six Sigma. This outside counsel is particularly critical for middle-market executives who often don’t have ready insight into industry best practices.
For example, GE recently worked with one of the largest cocoa bean processors in North America. The manufacturer’s goal was to reduce energy costs by 10% at its biggest processing plant. GE facilitated a three-day event with participants from the manufacturer, its suppliers and GE. The group generated dozens of ideas that carry the potential to save the company millions of dollars and reduce its energy spend by nearly 60%.
In today’s very competitive environment every basis point counts, but middle-market companies must be careful not to fixate on a lender’s interest rate to the exclusion of all else. Interest rates matter and a lender must be competitive. But first and foremost, a company should consider the depth of a lender’s industry knowledge.
If effectively delivered, this domain expertise will go beyond the balance sheet and give the company access to real-world insights, innovation, tools and resources to meet its toughest challenges. In the long run, the company gets more than a lender, it gets a strategic partner.
Tom Quindlen is president and CEO of GE Capital, Corporate Finance, providing asset-based, cash flow and structured loans ($20 million+) and leases ($500,000+) to mid-size and large U.S. companies. For more information, visit: www.gecapital.com/americas.