Getting You to Point B

Nothing Fits the Box

Asset-Based Lending in 2011 and Beyond

As published in The Secured Lender (Jan/Feb 2011 issue)
http://www.thesecuredlender-digital.com/thesecuredlender/20110102# 

Remember the good old days (i.e. two years ago) when you judged deals by how well they fit into your credit box?  And for the tougher deals, we as lenders would get creative and think ‘outside the box’.  Well, after two years of economic chaos, nothing fits the box anymore.  Everything seems outside the box, and maybe the reality is that there is no box anymore.  It appears that we have also said goodbye to our friends ‘the wheelhouse’, ‘the standard’, and ‘the norm’. 

For the last two years, businesses have had to face the reality of declining revenues and profits.  And for those businesses that were slow to react and sluggish in cutting expenses, big losses created upside down balance sheets resulting in a deterioration of the company’s net worth. 

Specialty lenders everywhere have seen increased financing opportunities.  But the ever-increasing number of opportunities has been tempered by decreasing credit quality.  What do you do with a deal that does not fit the standard advance rate box, or when traditional metrics do not provide the usual level of comfort?  Simply thinking outside the credit box is not a solution anymore.  Today, the metrics are different.  Each deal has its own story, its own drama, and its own challenges. 

Successful asset-based lenders now have to look beyond the traditional metrics and standard structures, which requires more sophistication and greater expertise.  It means that we have to “get under the covers” and look at the intangible metrics, such as the quality of the management team, the expertise that they bring to the table, and their ability to execute a strategic plan. 

Therefore, lenders have to approach transactions in a number of different ways.  At Presidential, traditional collateral and financial review is only the beginning.  We also include the following measures: 

• Request and review cash flow projections:  When collateral ruled the day, projections were not a critical component of the financial package.  Today, it is a crucial measurement of the company’s ability to plan, manage and succeed.
  
  
• Understand the strategic plan, and strategic vision, of the borrower:  What does the management team hope to accomplish?  What is their measure of success?  Are they hoping only to survive, or do they have a strategic vision of what the company’s success looks like?  Do they have the expertise and capacity to accomplish the plan? 
  
  
• Strength and capacity of the capital partner:  Whether a company is owned by a single shareholder, multiple shareholders, or supported by private equity, it is important to understand the ability of the company to obtain additional capital or sub-debt, should it be required by future circumstances.
  
  
• Relationship:  We view our relationship with the client as a partnership, and we seek clients that value the partnership aspect of what we do.  When this is done well, it facilitates proactive communication, which leads to new opportunities as well as helping to avoid stressful situations.  Our interaction with the management team, and the emphasis placed on their knowledge and expertise, is a deciding factor in determining which deals we pursue. 

These are the foundation blocks to structuring a successful transaction.  Confidence in management, built upon a strong relationship, creates an environment where strategy and structure can be successfully defined.  Without these, it is difficult to overcome the various components that define an outside the box transaction.  

All of this is done with an eye toward the future, because the closing is just the beginning of success.  Money out the door may make for a successful transaction, but the execution of a partnership, in spite of the drama and challenges, is what will make us all successful lenders.

 

Act Like You've Been There Before

Football, Success and the Chicken Dance

Commentary by Keith Kirkland

It’s the NFL postseason.  If you are a football fan, the playoffs provide the best opportunity to watch some great battles on the field. 

It’s also the time when highlight reels are packed with clips of professional players, so proud of themselves, doing their chicken struts, silly gyrations, self-congratulatory chest beating, and overall foolishness.  Many football fans grow weary of the self-importance and selfishness shown in the end zone and on the sidelines.  At least I do. 

These guys are paid to make plays, right?  It is their job to score touchdowns, or force turnovers, or sack the quarterback.  Yes, be proud of your work.  Do some high-fives and fist-bumps.  Celebrate success.  But please, keep the “I’m the Man” dance to yourself.  

I was watching a game with a friend recently, and during a particularly ungraceful chicken dance, he said, “Come on!  Act like you’ve been there before.” 

I’ve been pondering that comment, because it really stuck with me.  And like many things, I began to apply it to what we do every day as a lender.  Here are my thoughts: 

Be professional.  Especially when you are successful.  Celebrate your success, but do it in a professional way. 

Don’t act like this is your first time to succeed.  Others may think that your success is a fluke and take you less seriously. 

Your success is not yours alone.  Don’t act like you were the only contributor.  There is usually a whole team around you that affected the outcome in some way. 

There are some great battles being fought in the midst of this economic chaos.  We are fortunate to be standing strong, so I’ve been thinking…”act like you’ve been there before”.  And you know what?  We have been here before.  We have been providing working capital financing to businesses and healthcare providers for almost thirty years.  And during those thirty years, we have experienced recessions, stock market declines, real estate cycles, and all types of ups and downs. 

But we didn’t panic.  

Have we made adjustments?  Yes.   Have we made some changes?  Yes.  Have we been successful?  Yes.  But you won’t find us doing any chicken dances. 

In fact, we would not be successful without the huge team of people that surround us every day.  These include our incredible employees, our clients, and the many people (bankers, private equity sponsors, brokers, other lenders and friends) that trust us enough to send businesses our way with hopes that we can help. 

Yes, we do celebrate some, but only with some high-fives and fist-bumps in the form of deal announcements and marketing emails.  We are proud of what we are able to do, and if you know of a business or a healthcare provider that is in need of a financing solution, we’re here to help.

No Fat Cats. No TARP. Just Success.

Commentary by Keith Kirkland

For almost thirty years, Presidential Financial has helped businesses to succeed.  As a strategic business lending partner, we focus on providing working capital financing to commercial and healthcare businesses all across the United States.  During those thirty years, we have weathered all types of economic cycles.  And today, we continue to stand strong amidst the economic and political chaos.  

There is no shortage of news about the financial crisis.  If you follow the typical news sources, the focus continues to be on big banks and the SBA, and criticism of their ability to provide funding for small and mid-sized businesses.  If you follow politics, you find yourself in a maddening circle of finger pointing and blame-games that ignore the root causes of our economic problems and steer clear of any real solutions.  

Kent Hoover’s recent article at Portfolio.com, “Obama Jawbones the Bankers”, highlights this type of circular, solution-elusive conversation that is frustrating the lending community [see article here].  You’ll find this conversation familiar:

• President Obama calls bankers “fat-cats” and wants to persuade them to do what he wants.

• He wants banks to start lending again, but wants them to stop fighting legislation that would impact how banks operate on a daily basis.  But precisely because of some government legislation and regulation, it is more difficult for banks to lend money, regardless of their desire to do so.

• Obama says that his main message is very simple.  “America’s banks received extraordinary assistance from American taxpayers to rebuild their industry – and now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild our economy.”

•         But his simple message ignores the fact that government has some serious responsibility in creating the current crisis.  And it ignores the fact that there are heavy-handed conditions attached to this “extraordinary assistance”.  And completely ignored is the fact that our government continues to add to a stifling debt burden that is killing the very economy they want banks to somehow rebuild on their own.

•          Some suggest that community banks should be the focus of small and mid-sized business lending.  But community banks want no part of TARP funds because of the conditions that are attached to it.  And many face liquidity issues because of the decline in the value of real estate held as collateral and are not in a position to provide funding to businesses.

•         SBA loans, touted to be the solution for small business lending, are down over 40%.  And while this conversation continued to circle, the government allowed SBA enhancements to expire, further decreasing the effectiveness of these types of loans.

Pause here.  Take a deep breath and shake off the frustration. 

For almost thirty years, Presidential Financial has helped businesses to succeed.  

• Because we are privately-held, we control our own destiny.  

• Because we are not a bank, we are fortunate to avoid the increasingly complex regulatory requirements forced upon banks.  

• Because we are entrepreneurial, we are flexible and can adapt to changing markets and a chaotic economy.  

And because there are no fat cats here…and no TARP money in our pockets…we just focus on doing what we do.  We help our clients survive the chaos.  We help our clients grow their businesses.  We help our clients to succeed.

 

Presidential Financial
 Getting You to Point B

Commentary on recent 3Q results for Georgia banks

Georgia Banks to Report Poor Results for 3Q (Atlanta Business Chronicle, October 16-22, 2009)

The following are quotes from this article:

"Georgia banks are facing another wretched report card..."
 
"...[banks are] expected to show more steep losses on bad loans, and signs that the state faces more bank failures in the weeks and months ahead."
 
"...Georgia banks are continuing to feel the impact of troubled residential construction loans and foreclosures."
 
"...40% of banks nationwide would be unprofitable in the third quarter, up from 34%, according to FDIC data."

______________________________________________________

Presidential Financial is unaffected by the real estate crisis and focuses its lending efforts entirely on small and mid-sized businesses, and healthcare providers, throughout the United States.  Because of our commitment to businesses, we have avoided the pitfalls of real estate lending and continue to help businesses and healthcare companies reach success.  The banking outlook for 2010 and beyond continues to look bleak.  Presidential is not distracted by the declining values of real estate, or by the chaos in the banking market.  Look to Presidential for financing solutions for small and mid-sized businesses.

 

Alternative Sources for Business Credit are Alive and Well

a commentary by Keith Kirkland

Because of the real estate mess and the resulting mortgage crisis, many banks are facing liquidity issues and enduring penetrating scrutiny which has significantly impacted their ability to extend credit.  Although consumer credit is most widely discussed, credit for businesses is crucial in order to keep the economy moving.  While not discounting the impact that huge corporations have on our economy, most Americans do not work for big corporations.  What drives our economy are the small and mid-sized businesses across our country that employ most of our people.  All across the country, there are innovative, entrepreneurial-focused individuals that offer opportunity to millions of Americans. 

There are many banks that still actively support businesses by offering lines of credit, although the frenzy of negative stories would have you believe otherwise.  However, the truth is that because most banks have an 80% or more concentration in real estate loans, their ability to provide other types of financing is severely impacted regardless of their desire to provide business loans.  And this is before bank regulators have even begun to examine banks’ commercial loan portfolios.  It is expected that this scrutiny will result in an even greater scaling back of business loans.  Even SBA loans, which have typically been the alternative to a standard business loan, are not being effectively used to support businesses.  The result is that not only are businesses being declined credit from traditional sources, but many businesses that do have an existing credit line are being forced to find another lender.

There are two popular misnomers in the world of business lending.  One is that because a company does not qualify for traditional bank financing, it is not creditworthy.  The other is that if turned down by a bank, businesses have nowhere else to go.  Nothing could be further from the truth.  For decades, structured finance companies have been funding the growth of America’s small to mid-sized businesses.

Generally, there are three tiers of financing structures for small and mid-sized companies.  The most well-known is bank financing.  To qualify, there are usually strict requirements, but in meeting these requirements, the borrower is rewarded with low rates and minimal loan structure.  But not all companies qualify for bank financing, which is why structured financing exists.

The second tier is asset-based lending (ABL).  Asset-based lenders are looking for growing businesses with a quality management team.  But they are able to work with companies that don’t meet all of the typical bank criteria because they loan money based on the value of the company’s assets, primarily accounts receivable and inventory.  The lender values and monitors this collateral, which ultimately determines the amount of money that is available each day to the borrower.  The third tier structure is factoring, which is similar to ABL but focused primarily on the value of accounts receivable.

Certain ABL lenders and factoring companies are struggling, too.  In many cases it is due to the fact that these lenders rely on bank financing for liquidity, and the scale-back on business lending has impacted their ability to obtain financing.  But what is not reported is that there are many structured finance companies that are well-capitalized and well-funded and are actively supporting businesses all across the country.  These are the lenders that are not stingy with credit.  They are not bogged down with declining real estate portfolios and can focus on helping companies to achieve growth and success.

Have credit standards tightened this year?  Absolutely, and for very good reason.  But the story you are not hearing is that some lenders have money and are actively funding businesses every day.  They fully support the small and mid-sized business market in almost every industry.  How do you find these lenders?  Many of them are well-known at your local bank, and frequently work in conjunction with bankers to support bank clients that need a new financial partner.  These lenders also support organizations such as the Commercial Finance Association and the National Funding Association, both of which are great resources for businesses in search of financing.

Know that there are lenders that support America’s businesses, appreciate our entrepreneurs, and are actively benefiting our economy by doing what they do best.

Commentary on article: Fed Survey: Banks say loan demand down

The Denver Business Journal recently published an article discussing business loan demand (see article here), which included results from a Federal Reserve survey.  The results are interesting, yet only bankers were interviewed, which continues to perpetuate the idea that only banks are lending money to businesses.  Therefore, the widespread viewpoint on business lending is influenced by this singularly focused surveying and reporting.

The survey results included the following:

• Banks across the nation made fewer business loans in the 2nd quarter, and this was attributed to weaker loan demand and deteriorating creditworthiness of businesses.
• Loan demand was down in every category except prime residential mortgages.
• 45% of U.S. bankers reported weaker demand for commercial loans from large firms; and 55% indicated weaker demand from small firms.
• The bankers attributed this to the business' shrinking need to invest in plant or equipment.
• 55% of bankers stated that their credit standards are tighter than usual.

Our View

As members of the asset-based lending community (and the general non-bank lending community), we continually battle the notion that all business lending only follows the pattern of bank lending.  We believe in the bank's role in the marketplace; and being former bankers, we realize that banks fill a great need for consumers and businesses alike.  But a bank's lending structure and risk profile is very different from that of an asset-based lender or a factoring company.  These three tiers of lending exists because many businesses don't fit the structure and risk profile that a bank is looking for.

In today's current market, banks are in an almost impossible situation.  The real estate mess, and the resulting losses, have put them under such scrutiny and observation, that even banks with a great desire to do more C&I lending are not in a position to do so right now.  More than likely, that is the real reason for the decline in business loans made by banks.

We believe that a survey of non-bank lenders would show different results.  Certainly, the creditworthiness of businesses has affected the approval ratio.  But loan demand, I think these lenders would say, is as high as ever.  We continue to see a strong pipeline of transactions, and as we interact with other non-bank lenders, we hear similar stories.  Many of these transactions come from our bank friends all across the country as they see deals that cannot get done within the current bank market.

Businesses and entrepreneurs still need support, maybe even more so in today's market.  It is America's small and medium-sized businesses that keep our economy going and it is crucial that bank lenders and non-bank lenders continue to focus on keeping our country's businesses moving ahead.