Jay Sachetti joined Jeff O’Brien, partner at Husch Blackwell and Dyanne Ross-Hanson, president of Exit Planning Strategies talked about the market for mergers and acquisitions, exit planning opportunities for companies that don’t end up for sale and how companies can maximize their eventual sale price during an early October panel at the first Upsize on Tap event at Summit Brewing Co. in St. Paul.
When the state Legislature passed a law requiring employers to provide paid leave and safe time for employees, Justin Bieganek started hearing differing details from friends, colleagues and peers.
Obtaining a new line of credit, or extending or increasing an existing facility, remains a daunting task for even the most proven borrowers. Commercial lenders are now requiring borrowers to provide more collateral, comply with more restrictive financial covenants, seek guaranties from affiliates or owners of the business, and pay higher interest rates and fees.
Despite this difficult credit environment, there are steps that you, as a borrower, can take to increase your chances of obtaining a loan on mutually satisfactory terms.
Take inventory of your business assets and be ready to provide information about these assets to lenders in an accurate, concise and up-to-date manner. Lenders are increasingly requiring potential borrowers to secure all debts with their own assets, so be sure you have a recent and comprehensive listing of all of your real and personal property assets that can serve as collateral-including recent appraisals of these assets-ready for a lender’s review.
If any of the prospective collateral assets are or previously were encumbered as part of your existing or previous credit facilities, you must be able to show the amount of equity that remains unencumbered in the collateral or that the collateral no longer secures the prior indebtedness.
You should also consider your ability to obtain landlord or other lien waivers on the collateral, as well as the ability to grant lenders the right to take possession of the collateral in the event that you can’t meet your obligations under the new (or proposed) credit facility.
Along with presenting and verifying collateral, lenders are now requiring prospective borrowers to take additional steps to show that their businesses are creditworthy, and will remain so. To that end, lenders often require prospective borrowers to comply with more restrictive financial covenants and document the existence of more predictable and reliable cash flows to repay the loan.
Consequently, you should prepare realistic revenue and expense projection models and forecasts that your lender can review. In addition, be prepared to show a history of reliable cash flow, by organizing your historical financial information in a clear and concise fashion.
Lenders are no longer relying solely on collateral security and the repayment prospects of a borrower’s business when deciding whether to extend a loan. Lenders have tightened their credit policies to require that guarantees be given by affiliates or individuals with an interest in the borrower. Lenders may request these personal or entity guarantees in lieu of or, in many cases, in addition to asset collateral.
Be sure you are ready to identify possible sources of such guarantees, including founders, company principals and key investors. These potential guarantors should also be willing to provide collateral or document adequate cash flow projections to back up their guarantees.
You should also consider offering equity rights in your business to make the relationship more durable and further align your business interests with potential lenders. A share in your profits through the issuance of warrants or convertible debt may reduce the interest rates that lenders might charge on a credit facility and help increase your chances of getting a loan.
Lenders often view borrowers as possible customers of all of their financial services-not just their commercial credit services. Therefore, you should adopt a similar approach by viewing lenders as full-service financial institutions-not just credit sources.
Lenders may require you to keep commercial bank accounts with them for the dual purposes of security and permitting them to monitor your cash flow, but doing so may also help enhance your relationship with those institutions. Additionally, by utilizing multiple product offerings from your lender, you may increase the likelihood of successful negotiations should any future issues arise under the new credit facility.
Early in the process of seeking a new credit facility, prospective borrowers should have preliminary discussions with respected accounting or auditing firms whose people can help them prepare the financial statements that are often required by lenders. Be sure to maintain a current list of potential auditing firms to help reassure your lender that the required financial statements will be prepared and audited in a timely manner once the loan is made.
If you’ve been unable to obtain credit from traditional commercial lenders, you may want to consider alternatives. Venture capital funds and hedge funds have been making fewer equity investments in businesses recently due to the current economic conditions. As a result, some of these funds have been more willing to make loans rather than equity investments.
Although the economy is getting stronger and a new sense of normalcy is emerging, it is likely that the lending climate will remain a challenging one for the foreseeable future. With some careful planning and creative thinking, however, you can help increase your odds of obtaining a loan that’s a good fit for you and your business.
