For many business owners, the majority of original loans and funding will traditionally come from a bank (usually after initial funding from friends and family). As the years go on, the working capital line continues to grow with the business. But in some cases, due to a lack of hard assets or limitations at the bank due to their size, the banker needs to put a cap on the borrowing limits. So now what?
Great news: you have options. Check out the list below to learn more about different actions you can take to ensure you (and your company) receive the necessary guidance and assistance during this crucial point in time.
One solution is to use a different bank. If you are with a community bank, a regional bank may have different lending capacity/limits, guidelines and/or restrictions that better fit your needs. Additionally, your business might be in a space that the new bank considers a niche – meaning you may qualify for a higher lending limit/tolerance. These types of business or commercial bankers are readily available in the market and are willing to try and “bank” your business.
Money Center Banks
Large national or money center banks also often have different guidelines and limits, and may be able to meet your changing needs. However, the challenge with this option is that you must have the time to call all of them individually, essentially “working the switchboards” until you find the correct person to help you.
Private Equity Firms
Most decent size companies have been contacted by at least one or more private equity firms. While PE firms have money available, the downside is that you, the owner, will have to give up ownership – and at least some control – to receive funding. However, most owners are reluctant to give up control or significant ownership of their company, making this option relatively unfavorable.
While the word “investment” is in the title, investment bankers don’t actually invest in businesses. They first review the goals of the firm, examine the company ownership structure and assess the money raise/capital needs. Next a financial review is completed to better understand your business, financial needs and your future use of proceeds. The investment banker then acts as your agent and “markets” your needs to debt funds, money center banks and private equity firms. Because the investment banker spends all day interacting with these types of firms on multiple deals and opportunities, they already have existing contacts with the funder firms, which saves owners time, prevents possible missteps, and expands future options for the company. These options can allow for dividends/liquidity, growth capex, collateral-light fundings, removal of personal guaranties and limited amortization structures, to name a few. The key here is that the investment banker will contact as many of the right types of firms as needed in order to secure the best possible terms to meet you and your company’s needs.
No matter which route you chose to take, one thing is for sure: there are companies and individuals readily available to help you ensure your company’s continued success. How those goals are reached, however, is up to you.
Want to learn more about Bridgepoint? Check out our services or get in touch here.
Author: Mike Anderson
About Bridgepoint Merchant Banking
Bridgepoint Merchant Banking is a middle market investment banking and private equity firm that serves clients over their corporate life cycles by providing merger and acquisition and corporate finance advisory services. Bridgepoint Merchant Banking is a division of Bridgepoint Holdings, LLC. In order to offer securities-related Investment Banking Services discussed herein, to include M&A and institutional capital raising, certain Managing Principals of Bridgepoint are registered representatives of M&A Securities Group, Inc., an unaffiliated broker-dealer and member FINRA/SIPC.
How many times have you been caught off guard when one of the bank’s largest clients calls to give you a heads up that they are selling their business, and your mind probably goes right to the thought, “How am I going to replace this loan volume?”. Followed closely by the thought, “Wow – why didn’t the client ask for my advice or involvement in the process?”
You are not alone. Clients often enlist the help of an attorney or accountant long before (and sometimes exclusively) anyone else in the business transition process. Perhaps they are concerned about alarming their credit provider due to underwriting or negotiating leverage concerns. A more proactive stance by the high performing community banker can benefit your client and your bank. Below are three factors bankers should consider:
Elevate your Standing as a Trusted Advisor/Value Provider
There are many providers of credit and deposit services – and they mostly look alike to customers. It takes an intentional commitment to provide value in the form of pragmatic tactics and connection to resources. For instance, have you sponsored a transition planning seminar with a panel including an attorney, accountant, investment banker and financial advisor (likely one of your employees). Proactively bringing this conversation to your clients insures your seat at the table as strategic discussions begin.
Provide more Sophisticated Financing Alternatives
Most people assume transition planning means selling a business to a third party when the owner is ready to retire. While that may be the case, it might also mean a management buy-out of the founder or a recapitalization strategy that pays a dividend to the owner who uses it to fund trust accounts for family members. Community banks could play a part in any of these strategies, and should most certainly be aware of the structure and mechanics at a minimum.
Acquisition loans are sometimes troublesome for banks to underwrite due to the “blue-sky” portion of the request not backed by traditional collateral. An SBA guaranty is a well-known solution, but there are also mezzanine lenders that provide additional debt that may be more flexible and user-friendly. These lenders are happy to work with a local bank leading the deal. Further, in the dividend recapitalization scenario, there are debt providers that will partner with a community bank to provide higher leveraged loans with no expectation or desire for other ancillary services. Thus, teaming up with an alternate capital provider can fend off competition from large national players.
Capture more Bank Deposits or Assets Under Management
Bank clients are typically more apt to reexamine their vendor relationships during major transactions (expansion, new building, acquisition). If your client doesn’t know that you are well-educated and well-connected in the business transition space, they might be introduced to larger organizations to handle their transaction and ultimately be sold on the thought of that larger organization handling all of their financial service needs post-transaction. By proactively inserting yourself into the discussion through client education efforts, you are more likely to avoid that scenario. It is likely that your client would be happy to place their newfound liquidity with a trusted relationship who helped them through the process.
In summary, the bank that 1) Makes the commitment to educate its team on the process and resources available in the business transition arena; and 2) Takes the initiative to be a part of the client’s planning/deal team, will no doubt outshine their competitors in growing business and retaining long-standing relationships.
For more information, contact Gary Grote at Bridgepoint Merchant Banking; 402-817-7940 or firstname.lastname@example.org. Bridgepoint helps lower and middle market businesses (including banks) sell or raise capital. Gary spent 23 years in community banking prior to his role as Managing Principal at Bridgepoint.