Calm Experience or Calamity—a new borrower wonders

I’ve heard some industry professionals describe the current debt market situation as “borrowers heaven.” This refers to the ability of prospective borrowers to attract financing on very favorable terms. It’s easy to understand how this is happening given the historic levels of capital market liquidity.

We are still seeing new lending entrants in the North American debt provider market. They come with a mandate from investors to put a lot of money in the market and they feel pressure to do it fast. Their presence impacts traditional lenders, whether they be banks or in the wide spectrum of commercial finance businesses. As a result, structures have become more flexible, and rates have plummeted to levels never imagined by industry professionals. The result is the so-called “borrowers heaven.”

Let’s get back to the title of this message “Calm Experience or Calamity—a new borrower wonders.” This new borrower has just struck a marvelous deal with a lender that's under enormous pressure to maintain or increase their funds employed. Under the current circumstances, it’s reasonable to assume the borrower is wondering how their new lender might react to changing circumstances—either positive or negative—in their business. Their new lender had a strong incentive to make the loan but might be very cautious about continuing the relationship as is when the situation affecting their borrower changes. The borrower was hoping for a calming experience throughout the relationship, but it’s just as likely to face the calamity of dealing with a lender unwilling to alter the terms of their lending agreement. Did the borrower choose the right lender? Would they have been better off selecting a lender less aggressive than the one they chose but who evidenced a very clear understanding of the borrower’s industry and their ability to compete therein?

We at Capital Access Partners are firm believers that businesses seeking capital of any kind should pay maximum attention to compatibility with their capital providers. Optimal Pairing™ = Optimal Results.

Inflation flashes daily—but not for money

You don’t have to look far every day for flashes of inflation. It seems that everything costs more from building materials to electronic components. One very visible sign is the report that existing home sales are 24% higher than in the first quarter of 2020.

One area where there is absolutely no cause for inflation jitters is the cost of money. Businesses in the midst of seeking capital, whether it be debt or equity, can attest to this. In part, thanks to the Fed, money has never been cheaper or more plentiful. And some at the Fed are talking about raising interest rates as late as 2023. The simple fact remains the supply of capital far exceeds the demand.

This results in an ideal situation for those seeking money. However, there is a booby trap. And, ironically, it has been fashioned on the demand-side thanks to business decision-makers focusing far more on price and structure than compatibility with the capital provider. They should be wary about cutting a great deal without considering what the longer-term relationship will bring particularly if the capital seeker’s business does not play out fairly close to the plans presented at the outset. Life is too short for a borrower to be exposed to such a booby trap. Don’t let it happen.

Our mission at Capital Access Partners is to prevent that from happening to our clients. We are firm believers that businesses seeking capital of any kind should pay maximum attention to compatibility with their capital providers. Optimal Pairing™ = Optimal Results.

The Prospective Borrower Information Pyramid

As with everything else in life where information is needed in order to make a decision, commercial lenders require information before offering a facility. The Prospective Borrower Information Pyramid illustrates the relationship between information disclosed to the prospective lender and the chance of credit committee approval.

If you advise or have influence over a prospective borrower, this is what you need to know.

In order to achieve funding targets in the context of an over-supply of lenders, commercial lenders are increasingly tempted to make financing offers well before they have been given enough data to properly satisfy themselves they will be able to obtain credit committee approval on the terms being offered.

The greater and more complete the information disclosed to the prospective lender prior to issuance of a term sheet, the more the prospective borrower can be reasonably confident that a facility will be supplied on the terms and conditions indicated in that term sheet once it has been issued. Note that it is not necessary for the lender to be presented with information sufficient to reach level five of the pyramid before deciding to issue a term sheet. At level five, very minor issues may arise after funding, and these can normally be quickly resolved by the team managing the relationship.

Should the lender receive information sufficient to reach level four before making the decision to supply financing? Maybe, maybe not. It depends on the circumstances of the prospective borrower and the status of the industry in which they operate.

Here’s an easy question. Should the borrower accept a term sheet after disclosing information sufficient only to reach level two of the pyramid? Absolutely not! In all cases, disclosing information sufficient to reach level three should be the minimum. Why is this? Recognize that the lender is anxious to get their money on the street and not lose the transaction to a competitor. They are increasingly tempted to offer financing before they adequately understand the borrower's circumstances. This can lead to an unsuccessful relationship. Let's be sure to avoid that.

What can the prospective borrower do knowing that many lenders are not asking for enough information? It’s simple. Be very open and straightforward with the prospective lender, providing a detailed overview of the facts - including the good and not so good, and make sure that the lender understands the nuances and how the collateral is affected. This honest approach will provide enough information to enable the lender to structure a facility more likely to be approved by their credit committee. The prospective borrower should not be in a hurry to get term sheets. Instead, they should be advised to make sure the prospective lender has sufficient facts before agreeing to a term sheet.

We at Capital Access Partners are firm believers that businesses seeking capital of any kind should pay maximum attention to compatibility with their capital providers. Optimal Pairing™ = Optimal Results.