For your emerging growth company to be successful, it is vital that you move in the right direction to obtain both operating financing and financing to fund your growth. In our previous article, we detailed three steps to help your company get and keep bank credit.
To ensure you are traveling down the right path, we will now describe three more steps in the road map emerging middle market companies should follow when seeking bank credit.
3 More Steps In The Roadmap to Get and Keep Bank Credit
4. Avoid bankers who are overly focused on collateral.
Many bankers find it easier to lend to middle market companies against collateral, including personal assets such as the business owner’s home. They do this, in many cases, without really knowing the value of the collateral and its status. Find a bank that is ready to lend based on a dynamic assessment of asset turnover and cash flow, not on a static formula such as a fixed percentage of inventory and accounts receivable. Be prepared to respond for a request for a personal guarantee. These can be on a limited or unlimited basis and are very commonly required of all but the strongest middle market companies. Discuss the provisions and their enforceability with your attorney.
5. Vet the bank carefully.
Favor banks that have transparent policies for credit decisions, pricing, terms, conditions and structure - and can explain the rationale for these requirements. Inquire as to the continuity in their lending and relationship management personnel. Do they have a record of having worked with clients through downturns to facilitate recovery? Have they reduced exposure to your size business or industry in the past? Will they respond quickly when you request assistance? Will you have access to those with a role in deciding on your loan, including your banker’s boss, the chief credit officer or risk officer? Ask for and talk to references, both provided by the bank and others you find through your business and personal contacts. It’s important that you consider your bank’s ability to serve your company’s other potential needs such as foreign exchange hedging, cash and investment management, leases, letters of credit, trade finance, etc. Review banks’ regulatory standing to mitigate risks that could stem from their own vulnerabilities. Inquire about their track record in calling business loans of your size and their "workout" process.
6. Utilize your professional advisors.
An advisor can help you communicate the strengths in your industry and your business and your strategy and tactics for mitigating risk. He or she can help you negotiate terms and conditions appropriate to your business and assure that the covenants provide you with sufficient future operating and financing flexibility. These might include:
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Profitability covenants
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Cash flow requirements
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Liquidity ratios and trade payment practices
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Leverage and capital structure limitations and requirements
An advisor can also play a key role in supporting your discussions and negotiations with the lender if covenant adjustments are needed.
Seek input from your accounting firm, especially as it relates to their other clients’ experience with the banks you are considering. Finally, be sure to have the loan documents reviewed by a business lawyer who has deep experience with bank debt agreements. They will help you negotiate favorable terms.
Has your company benefited from these steps? How has this changed your outlook on getting bank credit?
Contributing Authors
The below Newport partners came together to share their expertise concerning middle market companies and their need to find and keep adequate funding.
