Our friends at Revitalization Partners help companies make effective business decisions. Here is a blog from their newsletter with advice for companies seeking a loan. At Juniper Capital, we are committed to sharing business advice that helps you achieve successful real estate investments with private money loans in Washington and throughout the Pacific Northwest. Share your thoughts on this blog or our social channels, so we can continue to provide you with good information for operating a business:
There is an appropriate lender for almost every company. The key is knowing the right lender, the right criteria and the right presentation before you ask for the loan. By matching a business loan request to a lender with the correct characteristics, you are more likely to have a successful loan presentation.
Making an effective loan presentation to a lender can be one of the least understood concepts in the small and lower mid-market. The borrower is often told to “create a business plan” and to include various required documents. Believe it or not, this generic approach is more often than not met with a rejection.
The bottom line is, lenders want to be assured of two important things; a.) that your business will repay the proposed loan and b.) that there are sufficient assets to pay off the principal should the loan go into default. In small or family-owned mid-market businesses, the lender wants assurances that the owners will pay the loan if the business cannot. You must provide the lender with these two assurances in a clear and concise format. Lenders regularly reject loans when they do not understand the risk or the risk is greater than acceptable to the lender.
Also, know the type of lender you are talking to before you apply. Different lenders present different options, like cash flow loans, asset based loans, subordinated and mezzanine loans, and second lien loans. Each type of lender emphasizes different factors and strengths within your company.
Cash Flow Loans are made to a company on the basis of their expected cash flow. These loans often involve minimum loan thresholds or lending commitments that are not specifically tied to a borrowing base or the value of specific collateral that secures the loan. They often have financial maintenance covenants, such as minimum EBITDA requirements, fixed charge coverage ratios and leverage restrictions. A pure cash flow loan is generally offered to a very healthy company, mostly at the mid to upper end of the mid-market.
ABL or Asset Based Loans are sized as a percentage of and secured by certain assets of the borrower. These assets are typically accounts receivable (A/R), inventory, and in some cases property, plant and equipment (PP&E). Depending on the borrower and industry, lendable assets may also include items like intellectual property and other assets. Borrowing availability and capacity is limited to a percentage of the realizable value of the assets that meet defined eligibility criteria of the lender.
Most cash flow and ABL loans are established as a revolving facility, providing the borrower with a maximum amount that may be borrowed, paid back and re-borrowed over a specific amount of time (typically 3-5 years). The borrower usually pays a commitment fee. It is important to note that a lender may refuse to fund under a revolving facility if certain conditions are not met.
Finally, to get the loan that fits your business, please remember these rules:
1. Know your banker before you apply. Determine how they will underwrite your loan and make certain that your financial statements comply with that particular banks underwriting criteria.
2. Some underwriting conditions are flexible. If you have issues, don’t just submit your loan request, but work with your banker.
3. Be flexible. Often a loan will underwrite by changing the deal. Typical changes include reducing the loan amount, raising more equity, or offering addition or personal collateral.
Revitalization Partners is a Pacific Northwest business advisory and restructuring management firm with a track record of achieving the best possible outcomes for their clients. They specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Contact Revitalization Partners if you want the best resolution in the fastest time with the highest possible return.
Revitalization Partners… when a company is worth saving.