Given the volume of news about the
credit crisis, most executives might
surmise that business loans are difficult, if not downright impossible, to secure
in today’s lending environment.
But Chad Loar, vice president and middle
market team leader for Fifth Third Bank, is
on a mission to set the record straight. He
says that business loans are still available,
but taking a shotgun approach to the market will no longer work. Instead, executives should conduct research and prepare
detailed documentation before approaching a lending institution, because a pragmatic approach is best.
“The financing spigot has not been
turned off,” says Loar. “Many regional
banks have taken the initiative to identify
distressed loans in efforts to price risk
accordingly as well as exercise opportunities to sell a portion of these loans to raise
capital and be in a good position to grant
new loans. But lending policies have tightened and terms have changed, so business
owners need to prepare before approaching a lending institution.”
Smart Business spoke with Loar about
the available sources of working capital
and the best practices for securing funding.
What types of funding are available?
Traditional business lines of credit and
loans for owner-occupied real estate are
still available along with financing for
merger and acquisition transactions,
although in general, repayment time
frames have shortened for leverage buy-outs that consist of unsecured loans.
Instead of seven to eight years to repay an
unsecured acquisition note, business owners and private equity groups need to realize that repayment terms for such unse-cured notes in this economy now only warrant four to five years at the most and must
meet qualification requirements imposed
by the shorter amortization schedule.
Which lending markets offer the best opportunity?
Super regional banks continue to fund
new loans, but are being much more stringent and conservative, whereas community banks with surplus capital are poised to
take on higher risk. If you have an existing
banking relationship, start there because
the bankers are familiar with your business
and it helps to have an established track
record. The continued expansion of factoring companies also provides funding that’s
secured by accounts receivables or inventory. SBA loans are another option. If your
business is growing and creating new jobs,
investigate whether you can secure variable rate demand bonds through your city
or county. Last, investment bankers and
private equity groups are still offering funding in exchange for an equity stake in the
business, although that market has tightened considerably.
What’s the secret to securing financing?
First and foremost, business owners
must furnish complete, accurate and timely financial reporting. It is imperative that
the company’s financial and accounting
staff closes the books timely and reports
the financials statements to the bank or
financial institution within a specified
timeframe. Also, the lender will want to
review the past, present and future financial health of your business. So bring
audited financial statements for the last
three fiscal years as well as a year-to-date
statement.
A written business plan is the best way to
provide the lender with all the required
information but, whether it’s part of a business plan or a separate handout, be sure to
include a forecast for the balance of 2008
and 2009, including a revenue pipeline
report. Lenders want to review the documentation that supports your top line projections. The business plan should also
contrast your company’s performance in
major financial categories, such as SG&A
and R&D expenditures, against standard
industry benchmarks and include a
strengths, weaknesses, opportunities and
threats (SWOT) analysis as part of the
presentation.
The bottom line is that business loans
will not be granted without professionally
presented and thorough documentation.
What else should executives know about the
current lending climate?
Understand the banker’s position and
educate yourself, so you can approach the
lending market pragmatically, because the
current climate also results from of a lack
of liquidity in global markets. Owners
should plan for a longer due diligence
process and higher interest rates. Business
loan approval is now taking around 30 days
and as long as 60 days, if property is
involved and appraisals are needed. While
it’s still possible to secure working capital
or other debt needs, lenders are spending
more time scrutinizing deals, so owners
will be more successful if they prepare
thoroughly and research the market before
approaching a lender.
CHAD LOAR is vice president and middle market team leader for Fifth Third Bank in Tampa Bay. Reach him at (813) 306-2452 or
[email protected].
