Insights

Middle Market Borrowing

how your narrative can improve loan terms

Cerebro Insights Team

You’re ready to meet some lenders and get the best term sheets for your business. While your financials, business model and corporate structure are almost always determining factors, you can boost your chances of getting better loan terms if you accompany your proposal with a powerful narrative.

Middle-market narratives are different from others. Think about a startup pitch, rich with detail about how the founder started in his garage with grit. That story could help get a startup funded but wouldn’t convince a mid-market lender. Mid-market lenders will dig into your past and present successes in order to help them predict your future success.

“Your narrative is the showpiece of a lender’s credit memo. You want it to be robust, clear and to weave in qualitative details that match the numbers on your financial statements,” says Kevin Gaughan, Director of Lender Relations at Cerebro Capital. “An expertly crafted  narrative provides a glimpse into your company that wouldn’t otherwise be seen during the scoring process and can tip the loan terms in your favor.”

Your narrative is a channel for illuminating how you will use the funds to strengthen your company and grow future sales. “Lenders like to know that their capital is ultimately ‘de-risking the borrower’ and increasing the chances that you’ll be able to repay the loan,” says Gaughan, who works on a team of lending experts that have helped facilitate hundreds of loan requests. He offers this advice for the narrative creation process:

Do Your Homework

Borrowers often know what amount of capital they need, but don’t really understand not how lenders underwrite loans. Lenders put their capital to work in a certain way, and tend to focus in specific verticals, like restaurants or retail. You want to make a reasonable funding request that aligns with the lender’s goals. Your narrative should express clear business economics that will help underwriters accurately evaluate both costs and your ability to repay with interest in a certain timeframe.

Senior cash-flow lenders look for established businesses with strong financials that need working capital. An asset-based lender will want to understand the assets that can be used as collateral, including short-term assets, such as inventory or accounts receivable, or existing equipment, in order to collateralize the debt. Invoice financing are good loans for companies that have outstanding invoices and are looking for working capital, while equipment financing is ideal for companies looking to purchase fixed assets. 

Customer Relationships Are Key

The best narratives will include edifying details about your customers. Highlight any long-term binding contracts, as these will be looked upon favorably by the lender’s credit committee. It’s also good to talk about close relationships with prominent companies to help demonstrate the viability of your business. It’s less important to simply name-drop brands that have thousands of other suppliers—lenders know often these relationships are unexceptional and can end abruptly. Also, having more than 10% concentration in any one customer will raise a lender’s eyebrows.

Play the Long Game

Gaughan says there’s a limitus test for mid-market companies looking for loans: Will anyone care if you go out of business tomorrow? Any banker is going to want to know the market that you have carved out and the customer base you have captured over the years. Mid-market lenders also love to hear about your history as a business—when you started and how. A history of 10 or more years shows you’ve weathered at least one recession, but it’s O.K. if you don’t have a decade of business under your belt. Use your narrative to talk about how your industry performed during the last recession, or the types of customer contracts you’ve negotiated, or how you’re well-positioned against the competition.

Talk Up Your Assets

Innovative companies have an advantage in that lenders, now more than ever, view intellectual property as a valuable asset. The World Intellectual Property Office says intangible IP makes up around 80% of corporate value. Trademarks such as Apple and Facebook are valued in the billions of dollars.

Your narrative should include details about your physical assets and IP assets, including trademarks, copyrights and patents. IP may help companies secure their position for the long term, which will help banks justify longer maturities on their credit facilities. A famous example is Ford Motor Co. which in 2006 pledged its famous Ford blue logo design and other assets as part of a financial bailout.

You’ll also want to emphasize any investments in R&D product or service innovations  in your narrative and explain why they’re worthy to your business, customers and industry. Lenders view innovation as a way to increase your margins and sales going forward. 

“Our platform shows that companies that are digitizing or developing new products to gain a competitive edge tend to see reduced cost of capital,” Gaughan says.

Know Lenders Are Realistic

Bankers and other decision-makers don’t expect your numbers to be perfect every year. All businesses are going to have off years. When the going got tough, lenders want to know how you reacted: Did you scale back on people, achieve cost savings, focus on new lines of business? It’s really important to show in your narrative how you survived a downturn to alleviate any concerns.

A borrower’s narrative can be a true competitive advantage that goes beyond traditional credit-based risk scoring models. It can provide vital information for the decision-making process and reduce the uncertainty of the transaction for the lender. “Bankers are not looking for a completely riskless loan—that would be impossible—but they need to know why they should do or not do the deal,” Gaughan says.

A narrative can be a game changer in proving to lenders that you and your business are a good risk. Your unique story, crafted appropriately, can also help justify why you should have a larger loan at more advantageous rates. Take the time to work with an expert to craft a narrative for your needs—your next loan may depend on it.

How Can Cerebro Help Your Business?

Based on data collected from lenders and closed deals on our platform, Cerebro can provide you with an estimate of available loan options, estimated borrowing capacity and borrower strengths and weaknesses to help you make the best decision for your business. Our complimentary loan assessment takes just 15 minutes to complete.

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