We are in a period right now that I would describe as renewal shock. Companies have renewed loans already, some are in process and many more will do so in the coming months. We have seen first hand a number of changes, in the renewal process, terms and even in some cases polite nudges out the door from existing bank relationships. Rates are clearly higher, but just as important, underwriting standards have tightened, meaning deals are just harder to come by than they were a year ago, potentially even at your current bank partner. Very few banks are “not lending”, so the more important question is “how” are they lending and what does that mean for your business.
I won’t bore you with a long economics lesson, but the economy overall has slowed and due to multiple factors, there is less money in the banking system to be lent to borrowers than there was 6 to 12 months ago. That means we are in a state of increased scarcity. The days of low cost, easy to obtain financing are in the past. Unfortunately, in some cases, that may mean your deal that was bankable last year is not bankable today. We are involved firsthand with clients in that boat that either have to settle for a different structure or potentially find non-bank financing.
How do they see you? Underwriting has tightened across the board. Many banks have gotten picky on industry and company profile, either because of a higher perceived risk level, a high concentration or a combination thereof. Do you know how your bank views your industry? You want to. A majority of the banks we see will be more aggressive for existing customers than new ones, which can be to your benefit. You need to know where you stand in their eyes. Odds are it will not be exactly the same as it was 6, 12 or 18 months ago.
How has the process changed? Be prepared for a lot more questions about your business, its financial performance, its customers and its future. We see business owners at times getting offended by the level of questions that can be asked. “They never asked that before” is a common complaint. You are in the majority if you are hearing that. Don’t be alarmed, use it as an opportunity to make a strong case why they should still love you. We have also seen deals take longer to get done. Allot more time accordingly.
How might the deal look? Rates are clearly higher overall, as core interest rates have risen, but the spread over the whatever index the bank is using is also higher than it was a year ago. Fees are much more common, including higher origination fees. Unused line fees on lines of credit are commonplace as well, so you could pay more to just have capacity. And meaningful deposits at the lending bank are a norm, even to the point that we are seeing significant covenants tied to cash balances on hand. Be prepared for terms you may not have seen in a while, if ever.
Based on all this, a few points of caution and steps to take.
• Understand the whole deal – there is much more to evaluate beyond rate. Evaluate the entire structure. Understand the all-in costs. And understand the requirements and covenants. You will likely have new covenants and more of them, so you want to understand how it affects your business.
• Ask to see deal points in writing as early as possible. The lending industry, like many others has struggled to source talent. We have seen too many instances where the relationship banker does not understand what the bank can actually get done and deliver on. They likely will not put anything in writing that has not been vetted to some level. You cannot afford to be on the receiving end of a prolonged no.
• Get out ahead of a renewal, as you might, like many, need to start looking for a new home. The good news is there are still plenty of deals that will get done. And companies are moving to new banks that are lending – you just have to stand out above companies competing for the same dollars.
The banking sector and its impact on small businesses has created a new constraint. Accept the facts, do your homework, and be proactive – that is your best chance to get the options you want. The ultimate solution may not be perfect, but an imperfect deal could still allow you to put dollars to work and drive long term value in your business. Don’t let the renewal shock and its hurdles cloud that big picture. Keep growing boldly.
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