The Credit Perspective

The Middle Market Lending Process: You’ve Made the Pitch, What Happens Next?

By Rocky Gor

This article originally appeared in Forbes

Here’s a horror story for you: You’re a private equity or corporate borrower looking for a loan. You approach your small network of bankers and find one eager to do the deal. So you commit to a nonrefundable underwriting deposit (in the neighborhood of $150,000) and months of legwork, only for your lender to reject the deal at the last moment over “concentration limits” or “exposure risk” (forces outside your control).

Instead of securing a multimillion-dollar loan, you’ve wasted months of time and $150,000.

With economic constraints prompting lenders to tread cautiously, this horror story is being lived out more often than people realize. Fortunately, borrowers can take two important steps to mitigate the risk in accepting a capital provider for their loan.

Step 1: Start From The End

Obtaining a loan is a negotiation. The more certainty you express at the outset, the higher the likelihood of the negotiation going your way.

Borrowers typically approach a lender with their own endpoint in mind—how much capital they need and for what purpose. But lenders are viewing the deal from a risk perspective. They aren’t “along for the ride,” the way equity participants are; their ultimate goal is to recapture their principal plus interest. That is why lenders strive to construct a deal with manageable risk.

This is a crucial point: Lenders are always seeking to manage risk.

So when a borrower pitches a deal and simply asks for an amount of money for a set purpose, this leaves too many variables open to the lender. Never pitch a lender without first knowing all of the structural options available, so you can select the best combination of cost and flexibility. Otherwise, the lender will decide those variables for you. The lender will devise multiple debt structures and come back with the one that offers the most manageable risk scenario coupled with the highest potential. In other words, you’ll end up with a deal that is most beneficial to the lender.

Borrowers need to understand ways to structure loans to not only lower their cost of capital, but also obtain long-term flexibility based on their business model and growth ambitions. For example, if a borrower plans to scale through acquisitions, it would be beneficial when obtaining secured debt to negotiate the ability to raise incremental pari-passu debt without having to obtain lender approval.

Now, imagine approaching a lender with the demand that pari-passu debt should be allowed under pre-negotiated conditions. The lender will be more likely to think, “This borrower has done their homework. Forget pitching the high-priced, conservative debt structure. We’ll offer something more reasonable.”

Step 2: Understand Who’s Calling The Shots

Borrowers often talk about their banker, or lender, as if this organization is a monolithic entity with a single set of priorities. “My banker said they can do the SOFR plus 2.5%,” or “my lender is willing to offer me flexible refinancing terms.”

The reality is, lenders are hierarchical organizations filled with various gatekeepers and decision-makers: the chief credit officer, the head of underwriting, whichever division head your deal falls under and so on. Each member of the credit committee has their own priorities, risk appetites, concentration limits, ROI targets, etc. And each of these gatekeepers can squash an otherwise promising deal for their own reasons.

For example, the head of credit might determine that the risk parameters of the deal simply don’t align with the lender’s macro vision. Or the portfolio manager may decide the deal is poorly structured and needs stronger terms to match similar deals in the portfolio or recent portfolio trends.

In addition to the above, you may also have product heads: asset-based lending, leveraged loan, capital markets professionals (if the deal is big enough), etc. They offer advice on market structure and pricing. They can throw a monkey wrench into a deal by noting what competitors are doing, prompting the deal leads to raise pricing or introduce new terms, accordingly.

If it sounds like a labyrinthine process, that’s because it is. There is a layer of dissonance between how borrowers think a loan approval process should go and how it actually goes; borrowers simply do not appreciate the layers of complexity involved. By understanding how a deal progresses through each of these stages, however, borrowers can position their deal with a narrative that enables the front-end banker to sell this deal internally, thus increasing the odds of the deal being approved.

Safeguarding Against Rejection

Given the complexities of the debt-sourcing process, borrowers can take steps to safeguard against a deal being rejected by a lender’s credit committee. First, they can anticipate what the priorities and concerns of each stakeholder will be and address those proactively with the front-end banker, so the banker can make a stronger pitch internally. Seeking expert advice can help with this.

Borrowers can also diversify their lender pool by targeting a wider range of capital providers (by type, size, geography, etc.), which helps de-risk from a late-stage rejection. Digital platforms can help by doing these simultaneously—helping position a deal to ensure the most favorable terms, while instantly scaling lender outreach.

Securing a loan is a lengthy, manual and sequential process. Borrowers should take steps to accelerate the process and expand their options, to ensure the best possible outcome.





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