By: Fred Jones on November 26th, 2012

Put Your Best Foot Forward if You Need Corporate Financing

Just as a seller needs to make their home shine to get it ready for an open house, companies seeking financing need to present as attractive a face to the market as possible. Failing to put your best foot forward by pursuing a half-hearted approach to arranging credit could easily result in disappointing outcomes. Growth requires financing: working capital, permanent capital and possibly acquisition financing. While finance companies and other asset-based lenders fill needed roles in the early stages of corporate development, their loan pricing, terms and resulting constraints on operating flexibility are typically less advantageous to the borrower than bank financing. For an emerging growth company the ultimate goal should be to obtain unsecured credit facilities. Putting your best foot forward is the first step.

What to Prepare

Effectively presenting your company and enhancing your company’s attractiveness can make a big difference in making credit available and getting the best possible pricing and most flexible terms. It is best to start this process early—ideally months/years before a new facility is needed. Start by preparing a financial model (cash flows, income statement and balance sheets) for the next three years based on your strategic business plan.

Your package should also include:

Operating cash flows and resulting working capital and permanent capital needs; include leverage and debt coverage ratios.
Establish leverage and debt coverage targets.
Include sensitivity analysis for growth rates, margins, other critical issues such as commodity prices, to show that you have considered a broad range of scenarios that could impact your projections.

Include Financial Statements

You want to provide the best financial statements you feel you can afford. In increasing order of desirability, the alternatives are: your tax returns, a compilation, a review and audited financials. Ideally these should include: income statement, balance sheet, cash flow statementand footnotes. An unaudited compilation may suffice. If you do not have an audit done, consider reasonably inexpensive CPA verification of inventory and accounts receivable levels at year-end . Make sure that the footnotes to the financials are written to prevent unnecessary ambiguity or uncertainty.

Another part of your package should be documentation of 3-4 basic financial control policies/procedures, such as:

Controls over cash, especially cash disbursements.
Handling of incoming customer payments.
Opening/closing of bank accounts and signature authorities.
Travel and entertainment expense reimbursement policy—possibly the largest S,G & A expense after salaries.
Others for any particularly sensitive issues (e.g. FX or commodity risk hedging).

Formalize Your Game Plan (Strategic Plan)

A strategic plan that you are going to share with potential funders doesn’t have to be a long tome full of grand plans. Keep it short and pragmatic:

Start with industry issues--industry size, growth rate, major players, major trends, major issues, etc.
Define your company’s competitive position in its industry, your value proposition, your differentiating and competitive advantages, largest customers, barriers to entry by others, etc.
Describe your objectives over the next 1-3 years, together with general strategies for getting there.

Create Your Lender Presentation

Your presentation to lenders should include a summary of what you see as the landscape and dynamics of your industry and your position in it. It should include historical financial results with relevant financial ratios. It should also include:

Value proposition, competitive differentiating factors and strategies.
A profile of the management team.
Pro forma financial projections with relevant financial ratios.
Anticipated financing needs—types, amounts, timing.
Any major uncertainties/risks and mitigating factors/strategies.
Other services that lenders could provide.

Remember that banks need expectations for garnering fee income from other services that they can provide to your firm. Possible candidates for fee-based services include: cash management, FX hedging, investment management, corporate credit cards, etc.

Start a Dialogue

To start a dialogue with banks and/or other finance companies, select 4-5 banks that appear to have lending criteria, business interests and, ideally, industry expertise that match your situation. Review your lender presentation with them. Seek feedback regarding their comments, interests, concerns, suggestions, etc. Ask about indicative terms and pricing. Prioritize desired relationships and take next steps. Vet the bank’s ability/competitiveness to supply the financial services you need. If you don’t need the funds near-term, encourage the banks you find most attractive about the prospects for a longer-term relationship.

If funds are needed soon, discuss/finalize lending terms and agree on a detailed term sheet. If you are uncertain regarding market terms and pricing, seek an advisor for input. This detailed term sheet is crucial to ensure that you end up with the deal you negotiated. Giving lawyers only vague terms to document a loan virtually guarantees that you will lose control of some important final terms and elongate the documentation time and correspondingly increase related legal expenses. And remember that you will probably need to transition other services to the lead bank.

Building the Relationship

Maintain a dialogue with your lead bank regarding actual vs. expected results and your strategic plans. Be transparent and honest, notifying the bank of risks and potential problems in advance. Lenders don’t like surprises. While building a relationship of trust, nurture 1 or 2 other qualified banks as back-up and to provide future borrowing capacity.

Conclusions

Just as with any other personal or business relationship, good lending relationships require effort and communication. Familiarity and trust can make a critical difference. Remember that your lenders need to get straight-forward information about your company. They want to feel that your direction is predictable.

Finally, while there is a lot you can do on your own, assistance from an experienced, trusted advisor can streamline the process and improve the effectiveness of your presentation to financing sources. Such assistance can help ensure that you obtain the credit facility you need to finance growth, ride out the downturns and propel your company toward profitable growth.

Fred Jones