The Loan Funding End Game

(Part 3 in a 3-part series on The Efficient Road Map to a Loan Closing)

Have a Proposal? – You’ve Only Just Begun

Getting proposals from lenders in today’s tight credit market is incredibly challenging. The reality of closing your loan, though, is that the journey has only just begun. It is a long and arduous process and there are many opportunities for your deal to get derailed, altered or perhaps not funded at all.

In reports from the Federal Reserve and Phoenix Management Associates, lenders indicate that this year their lending has significantly slowed, despite the urging from the Federal Reserve and regulatory agencies -- a consequence of the changing landscape of how lenders do business. This is a dramatically different environment than even a year or two year ago.

At Primagency we have a unique focus on process that is designed to shorten the debt funding timeline while increasing the likelihood that a deal will get funded:

Yet, regardless of whether your client chooses to go it alone or seek professional agency representation like Primagency there must be close tracking of the process and tactics to keep your deal alive so that ultimately you get to the end-game: FUNDING.

 

The Path From Proposal To Funding

The first thing that will help is to understand lenders’ approval and funding process (which for Primagency begins at the fourth box on the above graphic). While each lender has different policy & procedures, the essential steps universally applied by all lenders are the following:

Signing the lender’s proposal and remit due diligence deposit …!’ Prepare documents for field examiners to review... !’  Commission third party appraisers of fixed assets and inventory and schedule appraisals and related inspections… !’ Field examination by lender’s examiners…!’ Preparation of field examiner’s report for submission to lender….!’ Preparation of lender’s internal credit memorandum for credit committee…. !’ Receive and incorporate appraisal results in credit memorandum. …!’ Credit committee approval and commitment….!’ Review and discussions of commitment with Borrower, and addressing of any issues….!’ Begin legal documentation…. !’Lien searches and background checks…. !’ Schedule of closing date…. !’ Take down audit….!’CLOSING.

 

Don't Be Afraid to Ask for Directions:

While there is a definite path to the loan funding process there ARE obstacles that could impede your progress.  To help you spot the blind alleys and avoid wrong turns in the funding process, here are some best practices we learned that can help drive your deal to a successful close:

  1. Get appraisal numbers in early – avoid surprises. Make sure that your proposed lender sees the final appraisals early because valuations on machinery & equipment and inventory are dropping quickly in the market. The delivery of appraisals late in the process can result in cash availability shortfalls. Shortfalls can prevent a loan closing or equally as bad, cause you to scramble at the eleventh hour for supplementary financing like junior capital or mezzanine – often at prices or terms that may be constrictive.

  2. Get involved early on inter-creditor agreements – the devil is in the details. In today’s credit climate it is actually unusual to have one senior secured lender to loan across required collateral pools within a company Lenders are inclined to advance on only specific collateral they are most comfortable with, allowing other lenders to address the remaining collateral for that borrower.

    3. The devil is in the details of inter-creditor agreements.. Borrowers can find themselves in the middle of a battle between co-lenders at the closing table as they struggle over such things as secondary and junior lien positions, stand still provisions in the event of default and foreclosure, and other considerations.

  3. Beware Loan Covenants – the poison pill. Although less of an issue with non-bank lenders than with regulated banking institutions, loan covenants can be a potential poison pill for borrowers post-closing. Be sure that the projections you have provided to lenders are not so aggressive that a change in business circumstances can quickly bring the entire loan into a default position. More importantly, negotiate cure provisions that give you the reasonable ability to bring the loan back into good standing.

  4. Run legal documents simultaneously. Depending on the need or urgency to fund a transaction, you may consider obtaining approval from the lender to retain the lender’s counsel to begin drafting the loan closing documents, even before a final commitment is made. This saves time and helps gain a head start on the process. A hidden benefit to this is that it will also uncover any legal or business issues sooner rather than later. Although the lender may require the borrower to advance the costs of legal, reluctance from the lender to start legal documentation can sometimes surface a potential unwillingness to fund the transaction; one can learn a lender’s true thinking about a deal that arises from this request.

 

It's Not the End of The Road

The loan funding end game is about much more than closing the deal.  A loan closing signals the beginning of a relationship between the lender and the borrower and defined within the loan agreements. The loan closing is only for today --but the relationship will last for an extended period, post-closing.  If done properly, the loan funding process is a roadmap that facilitates the successful operation and growth for your client's business.

  1. 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.   

  1.  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

© Primagency, Inc. All rights reserved. 2002.