Are you a Relationship or a Transaction – Choose Wisely

Posted on: January 22nd, 2018

relationship or transaction The finance world abounds with deal flow, that can be measured innumerable ways. Size, risk, multiple are just a few of the metrics. The focus on mathematical measurement on all aspects of lending criteria can lead to companies feeling adrift in a world they don’t understand.

It’s surprising how impersonal the lending process can be. Lenders often use language the prospect does not readily understand.

Their approval process can sound like an obscure, black box, with little information as to who the final decisionmakers are and how they think. The consolidation of the banking industry and the emergence of crowd funding loan platforms have exacerbated this trend.

Big Banks exert centralized credit authority, and have largely reduced the loan process to a numbers game outside of the control of the local field officers. Online loan platforms intake detailed financial information and map it against pre-established lending algorithms to arrive at a go – no go loan decision, without even a meeting.

The removal of the human element has resulted in a commoditization and depersonalization of the process. It has made it much harder for growing companies to build meaningful relationships with their lenders.

These lender relationships are critically important for ambitious companies embarking on a growth journey. The best lenders, which are usually small funds or smaller regional banks, understand that they are in the people business and consciously seek out companies to have relationships with.

They try harder than Big banks and big funds to connect with management and learn what makes them tick. While many companies are tempted to take the best deal with the best rates, it is highly advisable to use a more holistic approach to lender selection that prioritizes the ability to form a relationship.

Lender relationships are vitally important to your long-term growth for the following reasons:

1. Relationships transcend numbers – most businesses usually hit a downturn. When this happens, non-relationship lenders can be disruptive to the business and make unreasonable requests. If you have a good lender relationship, they will be more patient and have faith that you can get things going in the right direction.
2. Relationships result in more funding – when a lender believes in you, they will go to bat for you and help however they can. They will refer customers, opportunities and provide critical future funding to help you scale. Where there is a strong bond, lenders give you the benefit of the doubt which can make a big difference in covenant breaches, intercreditor issues and increased availability.
3. Relationships impart stability – relationships persist, transactions are fleeting. Lenders that live by the transaction often hit the wall internally and need to reshuffle personnel. This turnover makes your life more difficult. Relationships with the decisionmaker give you peace of mind in knowing that the loan will not be called indiscriminately or sent into work out. Stability in your lender is an intangible asset that creates a positive internal environment and virtuous cycle of growth.

In the acquisition financing arena, capital availability is destiny as companies require reliable access to capital to grow over the long term. Unforeseen capital needs usually arise when acquirers least expect it. This can cause some concern for the acquisition financing provider, especially when covenants tighten up and that working capital availability is utilized faster than expected.

Mezzanine debt borrowing is usually a straightforward activity that many companies use for funding of transitional growth. Mezzanine debt lenders are highly transparent about their due diligence approach and their post-closing loan management making it easy for companies to engage with.

Elections have consequences and positive ones at that for the acquisition financing middle market. While much media attention is paid to the direction of the yield curve and the Fed’s likely rate cuts, scant attention is paid to the more important drivers of the acquisition financing market – business psychology and regulatory climate.