The 4 Reasons Financing Relationships Matter

Posted on: March 15th, 2019

Financing Relationships

Given the financialization of the economy, it is no wonder that people focus on interest rates first and foremost when considering taking a loan. Not a day goes by without a barrage of loan solicitations promising quick approval and low interest.

Loan decisioning software in use is based on traditional as well as non-traditional credit metrics, allowing lenders to make loans to companies previously considered non-lendable.

Given the tech-lending times we live in, some old fashioned wisdom maybe warranted. As Groucho Marx once said, “I don’t want to belong to any club that would accept me as a member”. Through mocking selection criteria, Groucho raises a good point.

When you are approached with an unsolicited loan offer, you are being aggregated through a data driven marketing approach and being pigeon holed as a credit risk according to an algorithm. This has the effect of commoditizing you according to selection criteria of the lender.

This approach ignores a vast amount of information about your company – the more subjective information not easily attainable on the internet. Conversely, it communicates a lending approach that is data driven and automatic, and provides absolutely no signaling information about the lender’s behavior towards defaults, covenant misses, and other various forms of non-compliance.

This subjective information about lender and borrower-prospect was a central part of the lending market back in the days when community banks covered the companies in their market. Through building real as in –non-virtual relationships, borrowers could gain comfort with lenders and vice versa.

This subjective information communication is the lifeblood of a financing relationship. Financing relationships describe a relationship between lender and borrower that gives a company maximum flexibility.

If you’ve build a financing relationship with your bank, they will be patient even if the company misses numbers. Financing relationships lead to the buildup of trust between parties.

If you have a financing relationship, as opposed to a commodity loan, your lender understands the company at a deep level and is willing to be patient and hang in there with you during tough times. Having a financing relationship is very important if you are seeking acquisition financing. Here are the Attract Capital 4 reasons why a Financing relationship is key:

Managing unknown risks – all acquisitions have some post-closing surprise risk which usually causes numbers to be missed. When your bank is supportive, you can manage these hits more easily.
Need for Additional Time &amp; Space – acquisitions usually take more investment and more time than the initial plan. Most supportive lenders will reset covenants and maturities if they like the story and see progress being made.
Smart Decisions – lenders that understand your company and are committed long term make better and more information decisions long term. If you lender is supportive, they are far less likely to make a rash negative decision that could seriously affect your company.
Option for more capital – given how competitive it is to get a new borrowers, smart lenders are always looking to lend more to their existing portfolio companies. If you further additional acquisition financing down the road, your current lender is your best option.

As the Fed decides to ease interest rates, middle market acquisition financing structures will benefit in a number of ways. The underlying values of middle market companies will increase leading to a higher enterprise value and lower loan to value ratios for existing portfolio companies of acquisition financing lenders.

The role of acquisition financing is infrequently elevated above a functional transactional one. When a business needs financing to acquire, they go to the market and source acquisition financing to supplement their equity investment to close the deal. Despite existing in many different forms, acquisition financing is rarely explained in terms of the value it brings to the acquirer.

Acquisition financing underwriting usually focuses on business and financial issues that underpin the stability of cash flow. Providers of acquisition financing usually validate the durability of a company’s competitive advantage and the depth of its resource base. Environmental issues are usually not a major part of the analysis in today’s service and technology-based economy.