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 Brian.Lamb@53.com.