Does the current lending climate preclude entrepreneurs from starting a
new business or expanding one? Not if CEOs do their homework. Funding vehicles exist that will help CEOs achieve their
dreams; it’s just a matter of knowing what’s
available and making sure that your company can service the debt.
“Big companies have greater resources
because they have large infrastructures.
Therefore, they tend to find a greater number of financing solutions in a tight lending
market,” says Brian Lamb, CFO of Fifth
Third Bank (Tampa Bay). “CEOs of smaller organizations or start-up operations
must rely on external resources to source
loans and to understand how to make their
business attractive to a lender, given the
increased credit scrutiny in today’s lending
environment.”
Smart Business spoke with Lamb about
how CEOs of small companies can finance
expansion, given the current lending climate.
What should CEOs know about the current
lending climate before seeking funding?
Be sure that your company has adequate
cash flow to service the debt and enough
cash flow in reserve to continue making
payments, in the event the economy slows
and your company’s sales decrease. In this
particular market, lenders are scrutinizing
financial statements and a company’s
financial situation more closely, and one of
the things they will review is the value of
any collateralized assets used to secure the
loan. For example, if you’ve collateralized
the loan through real estate, the lender will
be looking at the property closely to make
certain that the value of the real estate and
the equity in the property are secure.
Lenders want to see a better balance
between debt and equity as part of their
tighter lending standards.
What are some of the available funding
options?
There are products in the market that
offer quarterly payments, which helps
with debt service through more advantageous cash flow. Some loans will let you
make interest-onl payments in the beginning, which will help expanding
companies grow into the debt service.
When you inquire about these funding
options, be sure to ask about the
covenants that are part of these loan
agreements. Those covenants usually
require companies to maintain certain
financial ratios as part of the agreement.
CEOs should not be afraid of the
covenants; just think your decision
through and be sure to run projections
that will help you understand how your
business will perform under a variety of
economic scenarios and how those
covenants may affect payments. Fully
understand what the loan is actually
going to cost in terms of interest and
repayment under every possible set of
circumstances.
Can some of these loans be refinanced down
the road?
Yes, some loans offer CEOs the opportunity to refinance the terms, or the
product may offer tiered pricing based
upon certain criteria, so be sure to
inquire about that before securing the
funding because it’s not an automatic
feature. The refinancing or tiered pricing feature is usually tied to hitting certain
thresholds or debt service coverage
ratios and, while not every company can
qualify for this option, it’s definitely
worth pursuing. Also, in 36 months the
market could be completely different, so
it may be advantageous to leave options
open to refinance to more favorable
terms.
How can I improve my company’s ability to
service debt?
Look at some of the treasury management services your bank provides as a
way to gain efficiencies and lower operating costs. For example, there are ways
to reduce manual accounting processes
by taking advantage of online wire transfers and a reduction in the need to cut
manual checks. Now can actually be an
opportune time for CEOs to explore all
options that will reduce overhead and
increase their company’s ability to service debt.
What external resources are available to
help CEOs?
There are resources available for CEOs
of entrepreneurial firms, so no one
should have to go it alone. Ask your
banker what type of training he or she
can provide around lending products
and cash flow management techniques.
Given the current climate, CEOs will
need a more proactive approach to
securing financing because it may take
some time to prepare the company’s
financial statements and align your business model to meet the debt service.
Knowing your options well in advance of
the need is one of the best techniques to
keep your business growing in today’s
lending climate.
BRIAN LAMB is the CFO for Fifth Third Bank (Tampa Bay). Reach him at (813) 306-2491 or [email protected].
