When the Search for Capital Goes Wrong
In part because there are so many options, it’s easy for owners to make choices that they come to regret.
Over the last few weeks at MultiFunding, I have taken several calls from entrepreneurs who are in the process of trying to borrow money and are starting to fear that the path they have chosen might not work out. I would like to share a few of these stories in the hope that valuable lessons can be learned from them.
I received a call from a borrower who is in the process of purchasing a bakery. The business is solid and cash flows well, but his challenge is that he lacks direct industry experience, which may give lenders pause, particularly in the food industry. He got deep down the path with an aggressive and solid SBA lender, but about 75 days into the process, the file reached the desk of a credit manager who said he wouldn’t approve the loan. Sometimes, in situations like this, a back-and-forth occurs between the sales and credit teams—until one side ultimately prevails. The loan is still under review, but in the meantime, the borrower is understandably getting nervous that he might need to start again. I’m guessing that’s pretty likely.
It would be fair to ask how such a thing could happen. Sometimes, a new or aggressive front-end salesperson may not have received adequate training or may not be familiar with the nuances of a credit culture or policy. Additionally, there can be a change in credit policy, or a new credit manager could be hired during the underwriting process. In lending, nothing is over until the check clears the bank.
It’s important to remember that not all SBA lenders are the same. Credit policies and philosophies can vary significantly from bank to bank, even though they are all working within the SBA’s rules. I strongly recommend pushing your front-end business development officer hard at the beginning of the process. Ask the officer what he or she considers the most significant vulnerabilities in your application and how the institution is likely to respond to them. This approach gives you the best chance to avoid a situation like the hopeful baker’s.
In another situation, I advised a borrower who was deep into the application process with a venture debt lender that would require the borrower to relinquish some equity and warrants and that would allow the lender to purchase additional equity down the road. The goal is to fund the acquisition of $7 million of equipment that the business needs to expand and to open a second facility.
I have nothing against venture debt, as long as it’s the right fit for the situation, which is typically for companies that are venture-backed and don’t anticipate profitability for an extended period. But that is not the situation with this borrower, which is on the verge of being cash flow positive.
In this case, with the borrower having already spent months working on the application, I suggested that I was reasonably confident that MultiFunding could help the borrower meet its needs with a combination of SBA debt and equipment financing, thereby avoiding the need to give up equity or warrants. The borrower declined, saying that his clock is ticking and he did not want to start the process from scratch. At this point, he is still holding on to the hope that he will be able to complete his venture debt round.
I think the lesson here is to remember that if your business does well and you can finance with debt instead of equity, debt will almost always be cheaper. In this case, it’s likely that he could accomplish his goals purely with debt, but I understand that it would be painful to start fresh after having invested so much time in his first choice.
In another case, I am in discussions with a public company in Europe that is attempting to make its first acquisition in the United States, which is a time-sensitive matter. This business’s challenge is that the rates and terms it is accustomed to in Europe will not apply in the United States. In Europe, the company is established and has a track record. In the United States, it is just getting started, and it has no personal guarantees to offer as collateral. That means the guarantee must be based on the assets of the business. Despite these vulnerabilities, the company is collaborating with large financial institutions and awaiting responses. It might get lucky with a large bank at low rates, but I suspect it will not be long before the business calls me back.
If there is one theme that runs through these stories, it is that lending markets tend to be rational, and it is hard to fight gravity. Before starting the application process, gather as many opinions and options as possible. Figure out where you are most likely to fit. This does not mean that the result will be perfect every time, but if you start down the best path, you are most likely to achieve the best outcome.
