B A NK L E N D IN G
capacity to repay the loan (cash flow) and collateral (assets) to pay off the loan if the company can't make payments. What has now also entered the equation is the role of the financing. Before the Great Recession, banks may have allowed a lin-
gering balance on a line of credit to be paid off over time via a "term out." The reason why the line had an outstanding balance was that earnings may not have reached targets and/or cash that would have normally been used to pay down the line went to fund other needs. In any event, you could often count on the bank to "term out" this
amount. This option is limited because banks' credit officers often determine working capital shortfalls are best solved with equity, not bank debt. This is a big change from pre-Great Recession times and may require alternative forms of capital, such as subordinated debt and preferred equity as part of the financing plan.
MATCH PURPOSE WITH STRUCTURE The days of "easy" lines of credit are over. In fact, the past issuance of lines of credit that could be used for broad purposes has contributed to many of the financing dilemmas we help dealers fix. In today's environment, it is critical to match the structure of the financing with the purpose of the financing.
If you are looking to purchase long term assets with the pro-
ceeds of the financing you must have a long term pay off plan. If your financing is related to receivables, the loan should be short term and borrowings governed by the amount of receivables. Many dealers may not like the restraints of a "borrowing base" has, but it is a very good safety check to prevent a dealer from fall- ing into a financing trap from which they cannot escape. While it is true that obtaining bank financing now requires
more preparation and analysis—and may lead to addressing areas of your business you may not have immediately thought were relevant to the financing request—the environment is improving and banks are willing to lend. It will take more work to implement the strategies noted above, but the ben- efits of this approach will position your company for future financial success.
l FON
Matthew Ide is managing director of Angus Energy's Advisory & Finance team. He is joined by fellow Managing Director, Jeffrey Simpson. Angus Advisory & Finance provides advisory services for improving financial management practices and banking relation- ships, and designs/implements growth, risk management and acquisition strategies. The group also provides funded capital solutions through the investment fund, Angus Fund, L.P. Matt can be reached at (860)299-6856 or mide@angusenergy.com.
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