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The Wrong Bank

January 7, 2013

There's often a weird dance between lenders and less-than-stellar commercial borrowers. Banks try to politely say; "Leave" but they never really say it directly. And the poor business owner rarely understands what's being said. The worst lenders skirt the issue trying to be a friendly community lender and instead retract credit without any understanding of the damage they'll cause to the business which supports their loan.

My point here is that sometimes a CEO needs to find a new lender and they realize that borrowing money in 2013 is a tough proposition. Plenty has changed in the world of lending but the basics still come down to the Five C's.

Character. Banks lend to people, not businesses and they need to feel they can trust you to protect their money. Some questions they'll always ask themselves in credit committee are:
• Does management have a history of being honest, upright and timely?
• Do they face their issues with courage?
• How did they react to the recession of 2009?
• Is their plan one we want to invest in (is it a sure bet - we're only making a few points on the loan so it better be)?
• Is there a succession plan in place?

I recently helped a CEO secure a $12million credit facility with no personal guarantee (PG). He got off the PG because he'd proven his honor over time and I was able to vouch for his actions as well.

Capacity. This is simply the company's ability to repay its debts. Yes, at 3% interest rates, banks take a conservative view of this. Even 18% interest rate lenders will take a jaundiced view of your ability to service the debt. They need to know how they'll get out before they even consider getting in. The debt service coverage ratio is the primary formula lenders will use to assess your business. Buying time to get your business in shape to be bankable will be some of your most important negotiations ever.

Collateral. Welcome to borrowing post 2009. Lenders need to know what will secure their loan, what will they seize and sell when you can't pay the loan. They don't care about life insurance contracts, rich uncles or promises. They want something the sheriff can seize and secure for sale.
Capital. Does the company have sufficient working capital to fund its operations? Working capital is simply your current assets minus current liabilities. If you've already stretched the trade, your inventory is at a seasonal low and your cash cycle looks stubbornly set, lenders will be turned off. If, on the other hand, you're current with your payables, have room to improve your cash cycle and are willing to liquidate old inventory - then lenders will know you've got room for error in your working capital.

Conditions. This is simply trying to figure how broader issues might impact your business (your ability to repay the loan). Big recessions, industry cycles, dysfunction in Washington all factor in to the loan review process. You can't really impact this unless you're moving from a dying industry like printing to something more sustainable, say fulfillment.

The good news is that banks are desperate to lend and they're highly motivated to usher prospects through the underwriting process. Presenting a company's information as a storyline that makes sense and blends the past into an optimistic future is what lenders, or equity investors, want to see.

Jeff Sands is a Managing Director with Dorset Partners LLC. He works with CEOs to sort through their larger financial and operational challenges. 802-688-3419