The Dellacorte Group

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Published June 4, 2010 An Industry Insight by Robert F. Mancuso TheDeal.com History shows that small and middle-market companies are the backbone of America, but current statistics illustrate they are the tailbone of the lending community. Nearly four out of every 10 small businesses are unable to secure adequate working capital, according to the National Small Business Association. Complicating matters is the fact that the chasm between Wall Street and Main Street is widening. That’s why middle-market business owners need to start thinking like their lenders if they expect to secure the working capital they need to grow. In doing so, here are six areas that demand immediate attention: Capital structure. Middle-market businesses are viewed by lenders as risky — period. Those companies that can secure loans are subject to subpar terms. That’s why businesses need to consider alternative sources of capital, such as mezzanine funds and private equity. They should consider divesting nonessential assets to increase liquidity and prepaying bank loans with the proceeds of asset sales. Additionally, they need to examine all capital expenditures, especially in assets located outside the bank’s reach — for example, overseas subsidiaries, for which banks afford no credit, typically. By reassessing their capital structure, these businesses will be able to negotiate better terms, and as interest rates start to rise, that means saving money. Corporate governance. Without proper governance, businesses of any size lose perspective quickly. Lenders are well aware that middle-market companies are particularly susceptible to this. The importance of creating a strategically astute, diverse board of directors can’t be overstated. Working as internal advisers as well as supplemental eyes and ears, a strong board enhances information sharing and decision making. For lenders, it underscores a business’ foresight and growth prospects. Promotion standards. A shocking number of companies continue to promote executives based on relationships rather than pure merit — a practice that simply cannot be tolerated. As lenders face enormous pressure to limit commitments to the most important, promising businesses, it becomes necessary for company stakeholders to ask, “What will our lenders see that we haven’t?” Promotions or appointments based solely on relationships will be evident to lenders and cast doubts on corporate values. Implementing higher standards will enhance the creditworthiness of a borrower in a lender’s eyes. Financial transparency. When it comes to financials and lender relationships, silence is deadly. Many small and middle-market businesses hold financial cards close to the vest, leaving lenders to assume the worst. Rather than stonewall, business leaders must strengthen the relationship by sharing information and maintaining transparency. In addition to arousing suspicion, withholding important financial information leads to significant challenges should an issue arise and the information necessary to address it be inaccessible. Lender due diligence. Middle-market businesses must do their homework before approaching a potential lender.

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