Five Steps to Successful Financing

Part 2 of a 3-part series on The Efficient Roadmap to A Loan Closing (Part 1: How to Tell When Your Client Needs Financing. Part 2: 5 Steps to a Successful Financing, Part 3: The Loan Approval End-Game.)

Recognizing the early warning signs that your client needs financing is the first step on your path to a successful funding. Taking swift action early on can change the reception your clients get from lending institutions when your client goes to market.

Clearly, your role is to help your client determine what help is needed.  In some cases, your client’s business may fall neatly into a lender’s credit parameters making it easier to secure the funding your client needs.  However, in today’s tightened credit market it may be necessary to seek outside assistance from a specialist in these matters.

Here are 5 steps we recommend that you take with your client to help increase the likelihood of a successful financing:

1. Get in the game early.  As you already know, the cardinal rule for running a business is to NEVER run out of cash. The same holds true for securing funding.  Lenders are unforgiving and unlikely to fund your client’s business when they see signs of slipshod cash flow practices or financial mismanagement.  Most lenders choose to finance companies for growth, preferring to avoid companies in a downward spiral.  And in many cases they are reluctant to provide financing where they feel that senior management has not heeded their advisors and left funding decisions too late. 
2. Inform clients of the supply & demand of credit in today’s funding environment.  Gone are the days when a call to a bank or making copies of financial statements to lenders could secure a loan.  Consolidation in the lending community, reluctance from lenders on financing longer-term credit facilities like term loans¹ and a weak economy has all combined to create a tight credit environment, thus causing intense competition for lenders’ attention. The quarterly Federal Reserve and the Phoenix Lending Climate in America Survey continue to report tight credit conditions, similar to the credit environment in the 1990-91 economic recession.²   While the environment has been a little less-tight over the past 3 months³, these reports support the general observation from lenders that greater than 90% of all debt financing requests made by middle market companies are declined--!  
3. Educate clients on external events that affect the debt financing process. The loan approval process bewilders many corporate borrowers.  They don’t understand that lending decisions are not just made on their financial statements, but also on:

• The lender’s research on predictions on loan delinquencies within a borrowers industry. 

• Comparing the applicant to the lender’s largest or poorest performing existing loan in the same industry.

• The lender’s ability to access the public debt or equity markets. 

•  The lender’s current loan application volume relative to its closed loans ratio.

•  The opportunities for bank lenders to generate other fee producing business in addition to interest on the requested loan.  

Most of the time borrowers are not even aware that external events affect their companies and that avoiding missteps early in the process can mean the difference between an approval and a decline. For example, in a July, 22, 2002 New York Times article “A Torrent of Loans Becomes A Trickle” Riva D. Atlas reports that “for the last 17 months, banks have been cutting back on corporate lending, shunning companies in problem industries like energy, textiles, steel and telecommunications, and charging higher interest rates and bigger upfront fees on most other loans, even to top-rated companies in healthy industries.“  The Q2 2002 Phoenix Lending Survey concurs, listing Light Manufacturing (93%), Industrial Distribution (83%) and Service Companies (63%) as industries their financial institutions consider most attractive. 

4. Know when to call in a specialist.  If your client’s industry is currently out-of-favor  by certain lenders and/or if you have a client with a complex financial situation, it may warrant bringing in a specialist.  Trying to go it alone or making a few phone calls to lending officers you have met along the way could mean that you may actually be hurting your client and produce having reputable lenders decline on your client’s financing request, that a more thorough preparation may have resulted in an approval.  It’s very hard, if not impossible to convince a lender to reconsider a denial. 

Getting much needed assistance also means executives can focus on the vital job of running a business and guiding it successfully through its business cycles, particularly important during a turn around or difficult transition period.   

5.  Develop a winning end-game strategy before you speak to a lender.  In order to bring your client to a successful close you need to anticipate all obstacles they will face prior to approaching any lender.  This means that you must first develop a strategy that will help you get to the endgame - loan approval.

• Proper Preparation.   Whether you call in a specialist or go it alone, preparation is the most important step to a successful financing.

At Primagency, we have learned that the shotgun approach – faxing and “fedexing” your client’s financial statements to a list of lenders rarely works.  In addition, many lenders complain about receiving a clients’ financials in piecemeal fashion -- they find it extremely frustrating and consider this a sign of lack of commitment on the borrowers behalf.  In either case, lenders will react accordingly – take a quick glance at the borrower’s financials and move on to the next loan request. 

• Bifurcate – and even trifurcate -- the loan. In today’s present credit environment and in order to manage their credit risk, lenders are increasingly co-lending to a single borrowing group by lending only against specific collateral types, i.e., revolving lender, equipment lender, real estate lender.  Few lenders will advance on all of these assets for one-stop-shopping transactions. 

This means that, to increase the likelihood that your client’s deal gets funded, you need to be creative and think carefully about how to structure the loan – as a one-stop-shop or by matching lenders to different collateral pools within the same borrowing group.  It is also essential to be current on each lending institution’s credit parameters on a national and a local office-by-office level so that you can market, package and merchandise your client’s loan to make it amenable to the lender’s portfolio in the local office.  Also beware – the devil is in the details when it pertains to inter-creditor agreements.

• Due Diligence & Presentation.  If you know your client has an uneven track record or a year of poor performance, in today’s present credit environment it is important to address these issues head on.   This includes thorough due diligence on your client’s financials that go beyond GAAP to determine the true cash flow and adjusted EBIDTA  for non-recurring and pro-forma items.

• Getting to the end-game.  And finally, it means that you must help drive this deal to a close, addressing any objections that come out of the lender’s own credit review process and ensuring, as best as you can, that the deal closes as proposed.

 The loan approval process, while a long, arduous and very often a frustrating experience, is a necessary part of doing business and being successful.  Coaching your client through this process can simply be the difference in a company’s survival and opportunity for future growth.

 Reference Notes:

¹“Curing Term Loan-it is”, Primagency Navigator newsletter, June 2002

² Tighter Credit May Stifle Capital Spending Revival, By Greg Ip, Staff Reporter of The Wall Street Journal, Wednesday February 27, 2002 

³ Senior Loan Officer Opinion Survey, Federal Reserve Board, August 2002

          Phoenix Lending Climate in America, June 2002