Increase the Chances of Closing Your Mid-Market Corporate Loan
Mid-Market Lending Insights
Significant disruptions to the lending landscape in the past four months have left corporate borrowers scrambling to stay on top of changing requirements to close a deal. As lenders adjust their portfolios based on the performance in their book of business, they are tightening their credit requirements and asking tougher questions of potential borrowers.
The addition of government-backed programs, like Main Street Lending, while intended to help open up credit markets for small to mid-size businesses, has in actuality caused even more complications. Borrower expectations of sailing through the MSLP loan process are mismatched from lenders, who are limiting their participation in this program.
These market dynamics of high demand and lowered supply have created both the perfect storm for businesses already experiencing financial limitations, and an incredible opportunity for businesses who have benefited from, or are quickly recovering from, the pandemic.
Cerebro Capital has been working with hundreds of mid-market borrowers and our lender network over the past few months to help facilitate loans sized from $2MM-$100MM. Here are a few key insights for mid-market corporate borrowers.
Only certain loan structures are attracting lender interest
Companies with very strong predictable cash flows for 2020 will be prioritized for credit committees. For the Main Street Lending Program loans, commercial banks seeking new clients are moving forward with companies who have over $5MM in EBITDA and who have a large enough asset base to support the full loan amount. Asset light companies should not be surprised by lenders requiring a Personal Guarantee even under MSLP loans.
Many companies are being left out of consideration
The Main Street Lending Program has recommended criteria for lender participation. However, lenders are not required to participate, and if they choose to participate, they are not required to approve all loan requests. Under the MSLP, banks use their normal underwriting standards which often require strong historical and projected cash flows sufficient to carry the debt load. For companies in heavily impacted industries such as hospitality, entertainment, and travel, it is not possible to accurately predict when things will begin to improve. Additional shutdowns and availability of a COVID vaccine — both of which are unpredictable — will likely prevent heavily impacted companies from receiving credit committee approval, even though they might meet the Fed program eligibility guidelines. Companies that are finding it difficult to secure funding through MSLP should be considering alternative paths, such as equity options and asset sales.
Refinancing can introduce a new lender relationship
MSLP currently does not allow incumbent lenders to refinance their existing loans. Therefore, companies that are interested in refinancing existing debt under the Main Street Priority Loan Facility (MSPLF) will have to seek out lenders that are accepting new clients. Lenders can take advantage of this opportunity to grow their portfolio and win new business. Borrowers should expect new lenders to require them to move their treasury and deposit service business from their prior bank.
M&A activity will increase as companies struggle to land loans
Winners in the M&A activity will include PE firms and independent sponsors who have enough cash for down payments and can afford to take on more debt. Commercial banks may shy away from acquisition deals outside of SBA loans (which cap at $5MM) for the near term as they continue to get a handle on liquidity concerns from their current book of business. However, non-bank lenders who have capital they need to deploy will likely be a good avenue for companies seeking acquisition financing over $5MM.
Cerebro is helping mid-market companies access a wide range of loan solutions, including the Main Street Lending Program, traditional financing, mezzanine financing, asset based loans, other government backed loans, and more. To learn more about the viability of your specific financing needs, get started with our Debt Capacity Calculator.
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