judge an applicant’s creditworthiness by examining
its business history, growth prospects, asset base,
cash-flow stability and the cyclical nature of its
industry. Middle-market companies should expect the
types of loans they can get to be a product of their
risk profile and the amount of leverage they already
have in the marketplace, says Michael E. Gibbons,
managing partner of investment banker Brown,
Gibbons, Lang & Co. in Chicago. CPAs familiar
with the current lending criteria also can help
their clients or employers take the necessary steps
to attract financing in this environment by advising
them to follow these eight tips. |
Remain focused on core competencies.
“Lenders want to see a company with
a strong focus on the aspects of its business that
are tried, true and profitable,” says Gibbons. “No
longer are banks excited by companies that are
branching out in several, untested directions.”
Maintain a strong asset base.
Because a company’s assets,
particularly machinery and equipment, are a
central component of collateral, banks are
aggressively demanding updated and frequent
independent appraisals on machinery and equipment.
Practitioners should tell clients to also pay
close attention to their accounts receivable and
inventory—two other key assets that serve as
Be prepared to accept tighter
stipulations in financing pacts.
It’s a lender’s market today.
Borrowers simply have fewer options and little or
no leverage to negotiate more favorable terms.
There still are loans out there, but fees and
spreads have become major issues. CPAs therefore
should recommend clients adjust their expectations
in this area.
Pursue a more flexible structure.
Blend bank funding with junior debt
(which can provide a company with incremental
capital) and subordinated debt (which also has a
lower claim of payment than senior debt) and
equity. “Middle-market companies no longer have
the luxury of raising capital from one or two
sources,” says Gibbons. “They should actively look
for additional lenders who, in exchange for higher
rates of return, are willing to assume more risk
and provide subordinated debt.”
Address “skeletons” up front.
No lender wants to learn at the last
minute that your employer or client is facing
serious—or even moderate—business challenges. And
it goes without saying that no one wishes to
discover such problems indirectly or from a third
party. CPAs should advise companies to be honest
and forthcoming with lenders and err on the side
Rationalize operations and eliminate
unproductive overhead. Banks
want to have confidence that your client or
employer runs a tight ship. Extravagant
expenditures—such as luxury car rentals or season
tickets for sporting events—are a surefire way to
raise a red flag in today’s lending climate.
Reduce dependence on individual
customers or suppliers. A
client’s reliance on a particular supplier or
customer in this economy represents a risk to the
lender. Middle-market companies should seek to
broaden their base of customers and suppliers so
that if one or two “go south,” the company won’t
be overly affected. Advise your client or employer
to take a look at any customer or supplier that
accounts for more than 10% of its total business
and analyze its options.
Build a strong management team.
The confidence your employer or
client’s management team exudes represents the
most persuasive factor in almost every lending
decision. Banks can become comfortable with the
challenges a company may face in production,
distribution or marketing if they have faith that
the people running the show have the experience,
expertise and sound judgment required to deal with
any problems that might come along.