5 Misconceptions: Do You Have the Best Corporate Financing Terms?
Mid-Market Lending Insights
The market has changed. Do you have the best financing terms?
Historically, many commercial borrowers have erroneously assumed that the effort and time involved to solicit lender bids is not worth the likelihood or benefit of improved terms. If you have not bid out your corporate credit facilities within the last three years, then you could be missing out on lower interest rates, better structures, looser covenants and more. Worse case scenario, by bidding out your facilities on a regular basis, you can keep your current lender competitive.
Consider what it would mean for the company in long term cost savings and growth opportunities, if your lending partner is better aligned with your near and long term goals.
New technology now enables borrowers to systematically scan the market and be matched to banks or non-bank lenders based on their specific needs. With less time and hassle, financial executives can now run a systematic RFP process regularly and say with confidence that their financing terms are the best in the market.
There are too many misconceptions about sourcing new lender relationships and credit RFPs. The bottom-line: the benefits far outweigh the costs.
Misconception #1: We have a strong relationship with our lender and believe they have given us the best deal possible.
Reality: Relationship bankers are constrained by their credit committee policies and internal mandates.
Of course, never underestimate the value of relationships. However, they will only benefit you as much as their credit policies and credit committees allow. In reality, relationships help make a financing request smoother, but it’s more limited than it seems. If you’re going to have a relationship with a banker, make sure he or she is part of a bank that truly understands (“gets”) your company goals, needs, challenges, and industry.
If your company starts experiencing better than expected performance and needs additional credit facilities (or conversely, the bank is not being amenable as you work through a challenging period), your relationship only takes you so far. In either situation, it might be time to look beyond.
Best of all, a borrower can engage in a systematic RFP process without harming your bank relationship. Smart borrowers use the RFP process to obtain competitive terms sheets from other lenders to better negotiate with their current banker. There is no harm in keeping your current banker honest. After all, it is just business!
Misconception #2: Too much time and effort is required in shopping and selecting lenders, managing dozens of calls, etc.
Reality: While the RFP process (soliciting bids) does take time, technology makes this process faster than ever before. And you can go to one platform to shop across hundreds of lenders.
New data-driven algorithms and matching technology allows a borrower to systematically scan a diverse network of lenders. No longer does a borrower need to know exactly which type of lender or structure they are looking for in advance. Cerebro’s proprietary technology, coupled with market expertise, does the heavy lifting and matches specific borrowing needs to available targeted lenders. This saves borrowers time, headaches and ultimately money by avoiding conversations with the wrong lenders.
Misconception #3: Preparing financial models, responding to lenders’ questions, creating presentations, etc. is too much work.
Reality: Often, lenders are able to extract items needed for underwriting by reviewing the documents that are readily available.
Generally, a company already has their 3 years of historical statements and a company prepared forecast or budget. Since these materials already exist, very little new work needs to be done to satisfy the banks’ requirements. Additionally, if a systematic RFP process is managed like Cerebro’s, the borrower will receive a list of items upfront for them to compile with a consolidated list of follow-up items needed. This will eliminate the finance team having to constantly pull different documents for different lenders at different times.
Cerebro takes it a step further by setting up a custom data room with confidential 2-way communication. Lenders can easily review all necessary information. They receive alerts and notifications when additional documents are uploaded eliminating the need to constantly email files.
Misconception #4: Even if a better deal is identified, I don’t want to switch our treasury relationship, which can be a painful transition.
Reality: Many borrowers unknowingly overestimate the time required to transition Treasury functions. And it’s not even necessary when sourcing non-bank lenders.
Transitioning treasury management is typically only recommended if the borrower is receiving a large credit facility from a commercial bank. This requirement is moot if they are sourcing credit from a non-bank lender. But even still, the treasury management transition can occur as late as 12 months after a new loan has closed. This allows the transition to occur at a time that is most convenient for the borrower. Additionally, the bank would handle the burden of the work, including training and operational transition. So, although this does take some time, it is a structured and efficient process that can work on the borrower’s timeline.
Misconception #5: We already have the best possible loan terms. The last time we solicited bids in an RFP process, the resulting terms sheets were relatively similar.
Reality: The commercial loan market is fluid and dynamic in nature. While borrowers’ financial performance changes, so do banks’ lending priorities and requirements.
Government regulations (i.e., Dodd-Frank rollbacks in mid-2018) and a lender’s internal mandate to gain market share in a particular geographic region are just two examples of why a term sheet today from a lender might look very different than a term sheet from them a few years ago. Not to mention the company’s financial performance could have changed a lot in just a few years.
Finally, commercial borrowers typically only sourced term sheets from 3 or 4 lenders the last time their went to market. By using a systematic RFP process like Cerebro’s Credit Explorer, borrowers can access a network of hundreds of lenders and receive term sheets from as 10 or more lenders without wasting additional time or effort.
Make no assumptions regarding the value of your current bank or lender’s deal terms. The corporate borrowing market is changing quickly. New lenders entering new markets force the incumbents to be more aggressive. It’s up to the corporate finance team to fulfill their fiduciary responsibilities of finding a lender whose goals align with the company’s strategic plan. You won’t know if you are receiving the best structure, terms, or rates in the market unless you regularly bid our your facilities every few years.
Cerebro’s Credit Explorer combines a data-driven platform with transaction experts to run a systematic credit RFP process. They can help tell your story, craft the best narrative, setup custom data rooms and handle lender discussions on your behalf. Let us do the heavy lifting of finding the best terms for your loan needs. You might be as surprised as we are every time we compare term sheets.
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