Is It Time to Upgrade your Growth Capital Lender?

Posted on: January 27th, 2021

time-to-upgrade-your-lender

Lenders and borrowers have a symbiotic relationship which allows them both to benefit. Borrowers get much needed growth capital which enables them to grow. Lenders get earning assets which provides long term income. If both are investing in the relationship, and gaining value from it, there is commercial alignment. The major unknown is how the lender will behave and treat the company post-closing. There is a certain baseline expectation the borrower builds during the loan closing process.

Frequently this expectation is built upon how the lender will act, assuming all goes well. Realistically, it never always goes well. There will be a hiccup or performance lapse or even a missed covenant along the way. Often lenders overreact to bad news and become overly proactive in their loan management. Rather than rely on the borrower’s ability to course correct, they bring in experts or new people from the bank to try to fix the problem themselves. This can easily strain the relationship with the borrower. In addition to post closing behavior, lender mismatch can also become a flashpoint.

The loan may have been raised when the company was smaller and weaker which necessitated a more aggressive lender. Companies who are barely profitable or going through turnaround usually cannot get a bank loan, when they are seeking growth capital. The financing comes from asset-based lenders who tightly control the collateral. As companies become larger and more profitable, they outgrow their type of an approach. At this point, they need a more relaxed lender approach, and the ability to borrow more growth capital.

In in the absence of lender mismatch or a strained relationship, the relationship between borrower and lender can become stale, particularly if the bank has an onerous and bureaucratic management approach. Knowing when it is time to upgrade your lender is important, especially when the company is in a growth capital raise mode.

Warning Signs to Upgrade Your Growth Capital Lender

Here are 3 warning signs that it may be time to upgrade your lender.

1. Default for a minor reason – calling a default for a minor infraction shows lack of experience and credit judgement. Most seasoned lenders will overlook small violations and reserve their defaults for major issues.

2. Refusal to expand loan facility – most lenders want to provide more capital to their best customers. If you have built up debt capacity yet your lender will not increase the facility size, it could be time to move on. Good lenders will make every effort to make sure they continue to fund all growth capital needs of their borrower.

3. Lender Fatigue – sometimes a company gets worn out dealing with the requests of the borrowers. The goodwill in the relationship has expired and it is time to move on. Starting with a fresh lender can reinvigorate your growth trajectory and provide much needed growth capital.

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.