1.  Open conversations with many lenders.  If you need a different bank, they will have the notes to say that you have been talking and didn’t just rush through the door in desperation

2.  Take a look at your capital structure.  How much senior debt will a bank lend you?  How will you make up the difference?  Mezzanine debt, a subordinated loan or more equity?  It’s going to cost you more, but if you need financing, then you have to find it.

3.  Get your financial statements in good condition.  A tax return is inadequate.  Your CPA should probably prepare at least a compilation.  A review or full audit is better.

4.  Make your credit request stronger.  Provide everything a bank wants at the same time – company history, your own analysis of recent financial statements, competition, the future (your exit strategy)?  The easier you make the request on the bank officer, the more favorably you and your request will be viewed.   A solid request will also be a good drill for your own strategy.

5.  Be ready to answer the basic questions every lender is trained to ask on for a commercial loan request from a corporate borrower:

• What will you use the money for (Use of proceeds)
• How will you repay it? – (Source of repayment)
• How will repay it if that doesn’t work? (Fallback)

6.  Tell your intangible story better.  Most businesses these days do not have lots of tangible assets to secure loans.  And the lender, no matter what the interest rate, wants to know your business will be around to repay the loan (the answer to question #2 above).    Your story will likely be around your intangibles:  relationship capital, structural capital, human capital and strategic capital.  It should also include fallback (answer to question #3).

We are finding good reception with bankers for specific, data-driven descriptions of intangibles. 80% of the value of the average company today is intangible. Most bankers and businesspeople understand this intuitively but they often don’t have the information to tie value and intangibles together.

What does this mean? Banks are back in business for larger deals. It’s easier for a bank to make one $10 million loan than ten $1 million loans.   You do one risk analysis, not ten.  The pricing is probably at a healthy spread (the federal government subsidy provided to banks of allowing it to invest its $5 billion in cash for a good spread in Treasuries will not always be there for Citizens.)

But it’s still tough to get a loan if you are in a SME (small or mid-size enterprise). A recent Wall Street Journal article notes a very small increase in credit approval for small business in 2010.  This is off seriously-reduced levels from 2009.  Some of this reflects lesser demand from businesses that laid off workers and cut way back on discretionary expenses.  It also reflects a drying up of M&A activity in the SME space.  Even in distressed situations, many owners just turned off the lights and closed up rather than trying to sell which might have required financing.

In 2011, the game is still the same.  Banks make a spread of 5 or 6% over the cost of funds when they make a loan. This is a small return for a loan that could carry considerable risk.  And because banks got hammered by lots of dicey real estate exposure and had a severe liquidity crisis leading many to take TARP money,  bankers have been reluctant to lend into the SME in the past two or three years.

So if you are an SME looking for financing in 2011, it will be challenging. But speaking as a 17-year veteran of commercial lending, I will tell you that there are a lot of things that you can do to increase your chances of getting what you want.

Some businesses are trying to avoid banks that took TARP money, not wanting their fate to be in the hands of the government overseers (as Northern Trust learned this week with the flap over the sponsorship of the PGA tournament in Los Angeles). If your business needs a multi-million dollar loan facility, working with larger banks may be unavoidable. But if your loan needs are smaller, you might be better off looking at community or medium sized banks that rejected the government’s funding offer.

Also, owners should consider other forms of capital, such as injecting more equity or shareholder loans, as well as better trade terms from suppliers.

Business owners should become accustomed to the idea of more collateral needing to be pledged, higher rates and fees, requests for personal guarantees from the owners and tighter covenants. At all costs, loan defaults must be avoided because banks will not show much appetite to forbear. If your company’s revenues are declining, you must be ruthless in cutting costs in response (or in advance) to avoid this possibility.

At some point, from the lessons learned in Argentina, it is likely that inflation will return to the U.S., and business owners and investors will need to be ready to adjust their financing practices. However, at least for the near term, Fed chief Bernanke has downplayed the threat of inflation.

Today’s lending environment in the U.S. isn’t quite that bad, but it also bears no resemblance to that of a couple years ago. If businesses can find loans from banks these days, the loan rate and fees are higher. The covenants and advance rates are also tighter, a far cry from the “covenant-light” loans that were made in 2005 and 2006.

The capital injections by the Bush and Obama administrations have averted a total meltdown of the U.S. banking system, but have created some “zombie” banks by deferring their inevitable insolvency (liabilities exceeding assets, exacerbated by declining asset values). The injected capital has supported some key internal ratios, but no conditions to lend were attached, so the funds did not create much market liquidity.

So who’s lending? Let’s look at eastern Massachusetts, where I spoke with some bankers off the record this week.

The lenders who are booking new lending relationships are re-financing relationships that exist at other banks. There is little expansion of lines of credit. There is no merger and acquisition activity.

At some of the biggest banks in the area, here’s what we’re seeing. B of A is in the papers every day because of the disastrous acquisition of Merrill Lynch. An explanation of their lending approach in the lower and middle market is that the Bank would lend, but there is concern about the credit quality of the borrowers—so not many loans are being made there. Citizens just announced huge losses for the last quarter of 2008 and for the year as a whole. Sovereign was recently acquired by Banco Santander from Spain, which is now instituting tighter credit standards and overhauling the culture, making its lenders more cautious. And TD Banknorth appears to be the most active in lending at that end of the market, but can be selective when reviewing credits from these other banks.

One tier down, Middlesex Savings Bank and Eastern Bank seem to have avoided the toxic assets found at B of A and Citizens and are lending more aggressively, albeit selectively. Even in this sector, banks are establishing higher floors to loan rates, requesting more security, and tighter covenants.

Even mezzanine lenders, who were shut out when senior debt lenders were making more aggressive loans a few years ago, are getting involved—in response to the request by senior lenders to have more capital.   Mike Oleksak   2009

This is a very helpful book for owners and advisors to “gazelles”. To read more about this book, visit the author’s web site.

A Business Plan is really a marketing document for a company as a whole. It is used to present the company to an external party such as a lender, investor or potential M&A partner. One client of ours used the plan to raise money and then updated it slightly a couple years later to sell the business.

A good Business Plan is exciting. It reflects what is unique about the company and helps the reader understand its future potential. That is not to say a Business Plan can ignore the weaknesses of a company—in fact, a good Plan will disclose the weaknesses together with context and a discussion of how the weakness is being addressed.

We always try to find a special “hook” for a plan, a memorable explanation of the company’s business model or offering. A graphic is the ideal way to make an intangible like strategy more tangible to the reader.

The creation of a good Business Plan takes time. We would never advise a company to invest in this document just in case they have a need for it. But if there is a pretty good chance that you will need to raise money or attract partners in the future, start preparing now by keeping a file of stories that express who you are as a company, data that gives perspective on your market, and documents that will help paint a picture of the great opportunities that await your company—and, by extension, your potential partners.

For this reason, it’s always good to be ready for the worst with your bank. If the bank calls a loan or cancels a line of credit, do you have a “Plan B”? Do you know what you would do? Here are some points to consider:

1. Keep your current bank well-informed. Bankers hate surprises. For the relatively small spread over the cost of funds they get on commercial loans, they cannot take big risks. If they know how your business is doing and what your plans are for the future, you are in a better position, even if you have a hiccup.
2. Know your backups. Are there banks who have been trying to make appointments with you or your CFO for awhile? Take the time to see them! It will be much easier for them to have confidence lending to you if they know you already…especially in a down cycle.
3. Watch your cash position. Keep a close eye on your cash reserves and accumulate cash if you can. Postpone capital expenditures and reign in spending where possible. Conversely, if you are flush with cash, a downturn is the best time to pick up assets or companies/competitors at bargain basement prices.
4. Keep an eye on the credit markets. Find out if your bank is pressuring corporate borrowers to repay because they may have their own capital issues due to the sub-prime mortgage mess.
5. Know where you can go for liquidity. There are distressed lenders, receivables lenders, factors, and government programs that can help companies in a pickle.
6. Have a Business Plan ready in case you have to go to market. See the Industry Snapshot for more details.

- Michael Oleksak     2007

In the past few months, we have seen the tightening of the financial markets. M&A markets have slowed. Private equity deals are getting more conservative. Banks are tightening credit standards. And some banks have started calling loans that they were happy to have six or twelve months ago. Many financial players have overplayed their hands, and the pain of correction will be felt by many of their clients.

Whether or not you have trouble with your financial partners, this is a time to tread more carefully. Try to understand if your current deal is normal for your financial partner or “outside the box.” If you are too far outside that box, there is a good chance that something will happen that will cause your partner to get uncomfortable. If that does happen, you’ll need to move into an even more proactive mode.

Read Strategic Action for some ideas on how to manage through a troubled relationship with a financial partner.

-Mary Adams  2007

This book is written much like a textbook and is quite dense. It has numerous, detailed chapters in three sections: approaches to private business valuation, private company capital structure (including all kinds of lending and investing), and modes of business transfer. If you want a comprehensive source on the basics of all these topics, this is a great volume.

If you are familiar already with the basics of the private market, you still should know about this book. Slee is trying to shake up the business education world. He says that business schools teach finance that is based on corporate finance theories, such as capital asset or option pricing models, which are relevant to only the largest public companies in the U.S. These theories are irrelevant to most of the remaining companies, which make up most of the U.S. economy. He makes the case with this book that different theories reign in private markets, and that there is much room for improved understanding of these important and increasingly efficient economic systems. For more information on this book, visit www.robertsonfoley.com/book.html.  2005

Strategic planning is the ultimate efficiency play. It helps you spend less and make more. Why is this? Three main reasons—focus, resources, and results. If you think and prepare strategically for the future of your business, you will know exactly where you want to go, what resources you will need to get there, as well as what results you can expect and how to measure them. Everything else falls into place after that. By thinking before taking action, you invest wisely in the future of your business—avoiding costly mistakes and yielding a better bottom line.

When you have a clear strategy, accounting and finance become tools that allow you to put dollar amounts to your operational plans. This approach will force you to evaluate your strategic action plans, making sure you can afford the resources you need and get the profits you expect. This is a great reality check on your vision. It also will help you understand whether you have sufficient internal cash to fund your plans. If not, you may have to seek outside financing of some kind.

If you are considering outside financing, there are several factors that you should weigh in your decision:

Speed – This is the ultimate advantage of outside financing: it enables you to make investments in your business that might otherwise take years to fund internally. Make sure you understand whether this speed will truly give you the advantage you want, because it comes at a cost.

Cost – Using outside financing will make your plans more costly. Make sure you have the margins to cover this cost.

Control – You give up a degree of flexibility when you bring in a financing partner. The money you receive puts you into a new “vendor” relationship. That is, the financing partner will have a direct or indirect control over a lot of what you do. Make sure you think through how this will affect your ability to manage your company and fulfill your plans.

Risk – The increased cost and the loss of some degree of control that comes with outside financing “ups the ante” of your strategy. This risk will force you to work faster and smarter. This pressure can be a good thing, but it also decreases your margin of error. Make sure you have the margin to spare.

If you weigh all these factors and decide to move forward with external financing, you want to be sure that you pursue the right type of lender or investor. A very clear explanation of the different alternatives available is in Where’s the Money? by Art Beroff and Dwayne Moyers. Their detailed table of contents will give you a feel for the nineteen major categories of equity and debt financing reviewed in this book.

-Mary Adams    2004