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Success through Perseverance in Financing
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February 2012

Success through Perseverance in Financing 

 By C. Russell Slappey, CPA, Managing Partner/CEO

of Nperspective - CFO Services 

 

Getting the right type of financing you need to grow your company has been extremely difficult over the last few years.  The industry your business is in will greatly impact your chances for receiving the financing you need as well. So what should you do to get the financing you need?

 

Recently I worked on an engagement assisting a client in obtaining new financing and acting as their part-time CFO during this process. The bank they were working with decided they no longer fit the bank's credit profile and decided to pull or cancel their loan. During 2009 and 2010 this happened to many companies as the banks were struggling with their own internal issues and capital requirements due to the recession.
 
My client is in a very reactionary industry.  They deal with frequently changing regulations and have fluctuating transaction volumes.  These changes were greatly impacting their financials and their overall business model. However, due to the fact that we had timely financials we were able to incorporate changes being made due to industry regulations and overall market conditions quickly and timely into the financial projections of the company and make good business decisions to correct for these issues facing the company. Unfortunately the bank financing us had other plans due to their internal issues and decided to call our loan. The company had a $4M line of credit backed by all the assets of the company. A borrowing base report outlining the company's accounts receivable and work in process balances was required to substantiate the amount of the balance outstanding each month on the loan.

What's the first step? You need to understand your options to get new financing given your situation. In this case a traditional line of credit with no borrowing base report requirement was out of the question due to the company's poor ratio of assets to debts. The risk was also increased by the owner's history of taking large shareholder distributions and leaving little equity in the company. Banks typically want to see a ratio of assets to debts of better than 2 to 1 or 3 to 1 at a minimum and they also want the owner to build equity in the company and not pull all of it out so they have skin in the game so to speak.

We set out first to renew our line of credit with another financial institution based on a borrowing base being required as part of the package. I quickly called several of the large banks knowing some contacts in the area and got a lay of the land. I put together a summary financial package with the highlights of the company and sent them to four commercial loan bank contacts and had high level conversations with them about our financial ratios and their bank's current appetite for financing. It quickly became apparent that no one was going to be willing or able to get this done using a typical line of credit format.

Next step, we considered an ABL loan or asset based lending loan.  These types of loans are expensive with interest rates ranging from 13% to 25% at that time. They require a monthly, weekly or even daily borrowing base report requirements and funding is typical advanced on a customer invoice by invoice basis. However, these loans can be advantageous for a growing company as they typically have a higher limit than traditional lines of credit as long as the borrowing base calculation supports the balance outstanding and given the company's industry we knew we were about to explode with growth.

Again, the first step here is to put together a summary financial package with the highlights of the company and send them to a handful of ABL lender contacts and have high level conversations with them about our financial ratios and their banks current appetite for financing. After those conversations, it quickly became apparent that many of these lenders don't like progress billing arrangements that are customary in this company's industry but some ABL lenders can handle these types of transactions. Work through the lenders you're interviewing and ask them if they can't handle these requirements to give you two or three other institutions that can and move on. I must have called a dozen ABL lenders and interviewed them to narrow down the lenders that could handle our needs.

At this point it is time to get serious. So far we have shared just some high level financial information with the previous banking contacts. Build on your prior conversations and cut to the chase with the lenders to determine if they are even a fit for what you need.  The key is don't waste your time with the wrong institutions, narrow down your possible options by having meaningful conversations with lenders prior to committing your time preparing and submitting all of the documentation they need for underwriting to them unless they are a good fit.  Once you narrow down the institutions that can help your company, get the lenders list of required documents needed for underwriting and send all of them the same financial information and organize it so you can replicate the process quickly. We must have sent six lenders the full financial information request at the same time. It's a numbers game given the current economy if your company doesn't have the best financial ratios.

Take what you learn from the results of the detailed underwriting process and tweak your financial package for the next financial institution you approach. For instance we learned that the lenders were having a hard time understanding our billing processes so by the time we were done we had a complete write up of our billing processes and had it outlined by major customer so they didn't waste time being confused and focused on pushing our financing approval through underwriting. Also, make sure you are keeping your financial statements current as the lenders can take some time to get through their underwriting and will expect updated financial statements reports throughout this process.  We must have talked to twenty banks by the time we got approved and sent several detailed financial packages for underwriting and got only three offers for financing after all of that but we got what the company needed.  

So what did you learn? It's a process that can take some time given the current economy and changes taking place in the banking industry. You need good timely financial statements and reporting packages.

At Nperspective we spend a lot of time assisting clients with obtaining financing and can help you narrow down which financial institutions have an appetite for financing your company's needs, what they expect to see during the underwriting process and help you develop the reporting and process to increase your likelihood of success.

Please contact Janet Watson at (813) 317-3460 or [email protected]for further information or a free consultation.  

 

Did You Know?

Did you know that Nperspective was recently engaged to provide strategic and financial leadership for a rapidly-growing global consumer products marketing company?

 

Contact Janet Watson for more information.

Nperspective, LLC provides interim, part-time, and project CFO and Controller services using a flexible engagement model that is dependent on our clients' unique business needs.  Our partners are seasoned CFOs who focus on rolling up their sleeves, are accommodating to client needs and helping create significant value from within their finance organizations.