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.
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