Obtaining and Maximizing Bank Debt
Successful companies spend a great deal of time and effort developing and nurturing customer and key supplier relationships. Unfortunately, many of these same companies don't take the same approach to developing positive relationships with their bankers/lenders. Building a strong relationship with a lender is a critical element in the success of any company. Lenders, like everyone else, hate surprises.
Companies need to schedule regular updates with their bankers, including obtaining exposure to all key management. Don't hesitate to bang your own drum on good news, but always, always be up-front about bad news and have solutions ready.
COMPANIES WITH EXISTING BANK DEBT
Successful companies also put heavy emphasis on prospective new customers and targeted suppliers, but once again, often don't follow this path when it comes to banking relationships. Over time, bankers change positions and lenders change strategy.
Despite my company’s strong performance, I have been in a situation where another borrower in a somewhat related industry located 1,500 miles away hit the wall, resulting in a knee-jerk reaction from my bank’s credit officers. One lesson learned - always nurture and build at least two other potential banking relationships which fit your business. If you're not certain which other banks fit, ask a trusted advisor for help.
As companies grow and succeed, many times debt structure falls behind their success. The natural tendency is to "bump the facility a bit" each renewal. As companies grow, change and succeed, so should the structure and terms of their debt. This includes not only the level of the facility, but also issues such as interest rate, need for full guarantees, availability, term and so on. Begin by talking to your lender, but if you're not sure of the appropriate structure, reach out and seek advice from financial professionals.
COMPANIES SEEKING NEW OR REPLACEMENT BANK DEBT
The first step in seeking new bank debt is to make sure the company understands its capital needs, both in terms of amount and structure. While that sounds elementary, the process should start with laying out the strategic and tactical plans of the company, which are then reflected in financial projections looking forward for the next three years. This doesn't require "rocket science," just basic planning and modeling.
Next, I highly recommend clear understanding of the appropriate structures, terms and conditions for the type of debt you are seeking. Companies do not launch a new product or service without understanding the marketplace and the economics, and bank debt should be no different.
Once again, when in doubt, ask for help - other business owners, management and advisors are usually willing to share their experience. In many cases, the terms and conditions of debt are far more important to a growing company than shaving that last quarter point off the interest rate - I learned this lesson the hard way.
Do your homework. Find lenders who are a solid match with your business in terms of size, expansion capability, industry focus, business stage, owner objectives and so on. While finding a bank with money to lend is important, it is critical to find a lending partner capable of developing with the business - through both good and not-so-good times. In the past, my strongest banking relationship began when I learned how proud the lender was of having assisted another company through dramatic growth, change, turmoil and success.
Prepare a three to five-page data-rich executive overview about your company to share with prospective lenders. Most bankers won't take the time to fully sift through a 40-page business plan. The executive overview also needs to be tailored to address the requirements of lenders.
Approach this document the same way you would approach a proposal customized to the needs of a prospective customer. This tailoring includes the areas typically found in a business plan executive summary. Also, it should address items such as asset quality (for loan security), other debt (for possible subordination), ability and timeframe to repay and so on.
Understand and anticipate potential issues for lenders and address these issues up front. Remember, bankers hate surprises. These questions go beyond broad business trends to issues such as billing cycles, deferred or unearned revenue, customer concentrations, receivable dilution, future expansion needs and so on. In this regard, the best compliment I ever received was from a lender who wanted to know the name of the banker who helped prepare our company overview – which resulted in four banks vying for our loan.
Seek out a variety of alternatives among multiple lenders. I am not suggesting a broad email blast here, but rather a very professional and controlled process with a limited selection of lenders who, from your homework, you know will have an interest in the business and the opportunity.
Just like any other business situation, a little professional competition, structured the correct way, can dramatically level the playing field. If you don't know the prospective lenders, find someone to make an introduction, which carries an immediate badge of credibility.
Be reasonable. This goes back to the earlier point about understanding the lending landscape and appropriate terms and conditions for your company's situation. Even if you are successful in creating some competition, don't be greedy - remember that one of your objectives is a long-term partnering relationship that is rewarding to all parties.
Lastly, don't burn any bridges in the process. As discussed earlier, bankers change positions and lenders change strategies. In another past experience, a lending officer with a bank who flatly turned us down moved to another bank. Because we didn't take the turn down personally and continued to foster the individual relationship, two years later the new bank joined our lending syndicate and brought a significant increase in capacity for acquisitions.
THE BOTTOM LINE
Companies should approach their banking and lending relationships with a mindset similar to the way they approach customers, key suppliers and new markets. This is a key lesson that I learned from an early mentor. With that approach in mind, reach out for the experience of others to assist and guide you through the process, whether it's other business owners, management or trusted advisors.
By leveraging a varied network of banking relationships, Focus Enterprises is able to assist a wide variety of firms -- including portfolio companies of private equity groups -- in successfully obtaining debt and expanded banking relationships.
Companies utilizing Focus investment banking services can expect to accomplish three important objectives: (1) management remains focused on operational execution; (2) the company gains access to and credibility with a broad range of financial institutions and, through Focus, (3) the company leverages years of operating level experience in placing debt to meet long-term company objectives.