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SMALL BUSINESS | Financing And Insurance

Be a Choosy Borrower When Looking for Lender

Finding the best source of financing takes discipline, but if you invest the effort, you can take your company to the next level.

July 28, 1999|JUAN HOVEY

The competition for business loans continues to heat up, with more and more lenders competing to finance solid growth companies of all sizes.

But don't think this makes it easy to get a loan, even for a solid company with good financials and good management. Indeed, the reverse is true: The financial marketplace grows more complex even as the supply of capital grows, and the job of working your way through that marketplace gets harder, not simpler.

Is this bad news? Emphatically not. Getting the right kind of financing from the right source takes discipline and hard work, and you may need outside help to get the job done. But if you commit to the effort, you can get the capital you need to take your company to the next level.

To see why this is true, compare the array of borrowing alternatives open to any solid growth company with the humble home mortgage.

These days, many home buyers treat the mortgage as a commodity. They shop few variables other than the interest rate, and they don't much care where they send their monthly payments so long as they consider that one factor reasonable.

The business loan is not so simple. Indeed, many factors determine who will supply you with the financing you need and at what cost--among them:

* The industry in which you operate.

* The purpose and size of your loan.

* The profitability of your business.

* The stability of your business as measured by its maturity and financial condition.

* Your cash flow and the seasonality of your sales cycle.

* The character and quality of your collateral.

* Your credit rating, corporate and personal.

"The nature of your business operations often dictates what kind of loan you get and where you get it," said Joel J. Berman, a partner in Century City law firm Jeffer Mangels Butler & Marmaro, which represents both borrowers and lenders in corporate financing transactions.

"There's so much competition among lenders that if you're a business owner in need of outside financing, you find yourself in a bewildering marketplace, and if you don't understand how lenders approach their business, you may not get the financing you need. It's not like looking for a home loan. You have to know what lenders want from you and what you want from them."

Put another way, lenders are crowding the financial marketplace in greater numbers than ever before, but not every lender wants your business. Indeed, like merchants of all kinds, lenders stake out very specific areas of the marketplace, competing only for business they understand.

The trick is to find those lenders who understand your business in particular and turn the competition among them to your advantage.

How? To begin with, Berman said, you want to package your loan clearly and target your most likely lending sources, and that may mean using a loan broker familiar with your industry. Some brokers work on a retainer reflecting the size and complexity of the loan, and some charge a "success" fee payable if they close a deal that meets your needs.

With or without a broker, an attractive package from a solid business should attract commitments from more than one financing source, putting you in a good position to negotiate terms.

Here, too, you may need help, because if it takes discipline to find the right lender, it takes craft to negotiate the right loan.

"If you argue every point in the loan documents, you won't get anywhere," Berman said. "Some things are just nonnegotiable, and if you fight over them, you may poison the atmosphere, and you won't get your lender to agree to those points that can be really important to you as a borrower."

On the other hand, you can negotiate such things as your lender's definition of default, Berman said, probing such questions as these:

* Does the lender give you notice and offer you a grace period if you're late with a payment?

* Would the death of a principal shareholder in your company precipitate default? Can you address this problem with key-person life insurance?

* Does your lender want payments from your accounts receivable to go into a "lockbox" accessible only to your lender, or may they come first to you?

You also want to pay attention to the way your lender regards any loans made to your corporation by its principal shareholders, Berman said. Lenders commonly demand that you subordinate any such loans to theirs, but they may permit your company to pay interest on such a loan so long as you remain current on the senior debt.

Other points may prove negotiable as well, depending on the nature of your loan and your financial condition, Berman said. The key is to know what's important and what's not, and to focus only on the former.

"These days the challenge in getting a business loan is to make the right connections with the right people," Berman said, "and for the business owner who's not out in the financial marketplace on a regular basis, it can be hard to do.

"But it pays to do business with lenders the right way. With good help from professionals who understand the competition, you can get the right loan at the right time from a lender who will be happy to meet your needs going forward."

*

Juan Hovey can be reached at (805) 492-7909 or at jhovey@gte.net.

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