To kick off the process we contacted 4 banks, including the company's current lender. The company required a working capital line that would allow 15-20% sales growth over the next year; an equipment line to re-capitalize some of its fixed assets; and a term loan that would consolidate expensive long term debt, provide working capital relief and allow the owners a liquidity option.
The business had a very solid year in 2010 with sales growth well into double digits but was coming off the same struggles many manufacturers had in 2008 and 2009. It is a well established company in the Portland area.
More banks come to the party
A clear signal the bank market has turned the corner came from the numbers of banks interested in the business. This number quickly grew from the four originally contacted to eight. Banks are ready to lend again.
A note of caution. There are still a number of banks in trouble from the commercial real estate and residential mortgage disaster. We were careful to pick banks that are well capitalized and very interested in our business before requesting proposals.
The company is a mid sized manufacturer with international operations. Our initial thought was to enlist a large bank that could service both the domestic and international needs of the company. As we moved down our checklist of bank requirements we realized many of our needs could be served by community banks. The banks that made proposals were a mix of international banks with strong reputations and very solid community banks.
Pricing is important, but not the only criteria
Once we had the general financing structure laid out we included some other key requirements that revolved more around how the relationship would work and other services not just the loan terms. In general the larger banks were able to offer slightly better pricing and more relaxed covenants. The community banks were clearly prepared to dedicate more human resources and time to meet our overall business needs.
We crafted the relationship criteria around how the bank will help the company succeed and what evidence, human resources and programs, do they have in place to give us confidence they would follow through.
Access to the international markets allowed the large banks to price their products over the London Inter Bank Offering Rate (LIBOR) which is currently well below the Prime and Federal Home Loan Bank (FHLB) rate indexes the community banks base their interest rate spreads on. Interest rate floors on the loans were common in all the proposals but are negotiable. If you believe rates are headed north soon it may not matter much if there is a floor on the rate. However, if the rate initially proposed based on the spread and current rate is significantly below the floor there is room to negotiate.
By measuring and weighting our key criteria we were able to "score" the proposals of each bank. This scoring process clearly divided the banks into two groups; those who were competitive and those who were not. The competitive group was called back to sharpen their pencils and present to the management team.
One final reality check
After the management meeting and receiving revised proposals we took one final step. This step strengthened the evidence that local bankers are interested in lending again. Calls were made to four local Chief Financial Officers to obtain feedback on our bank finalists. Dick Howard, Applied Motion Systems; Joel Richter, Pedigo Products; Steve Porter, First Aid Only and Mike England, Columbia Ultimate all shared valuable insight into the bank market. All gave me confidence banks are searching for solid credits and are prepared to lend money. They also provided excellent feedback on our finalist banks.
Banks are ready to lend. Make sure the banks you invite into the process will be around for the long haul. Here are some closing thoughts for your next financing:
1) Decide how your business should be capitalized.
2) Create a financial model to help you understand how the financing will reshape your business.
3) Understand the type of bank that fits your business and pursue those banks.
4) Establish what you expect from the bank not only in terms of facility size, term and pricing but in terms of other services and resources they will commit to making your business a success.
5) Develop a scoring sheet based on your needs to compare bank proposals - include relationship criteria and other services, not simply loan terms.
6) Use your local contacts to validate your results