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 firstname.lastname@example.org.