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Take Control of Your Capital – Risk Assessment and Lender Match

By Rocky Gor

Executives endure countless pitch meetings to maintain lender relationships. Unfortunately, credit committees at relationship lenders don’t always come through.

What’s going wrong: Lenders are controlling your risk narrative.

Most borrowers,

  1. provide information sought by lenders,
  2. let lenders assess and position the risk, and
  3. wait for lenders will come back to them, hopefully with capital.

In this process, borrowers relinquish the opportunity to proactively target lenders relevant for their firm’s risk and lose control of the narrative.

Borrowers need to understand risk, the way lenders do, in order to proactively control the narrative and to target lenders that can deliver capital efficiently.

30% Principal Loss on One Loan = Interest Income on 10+ New Loans

Why it matters:

Survival of banks depends on their ability to predict and control loss making events in order to recover principal. While non-regulated private lenders accept more uncertainty in return for higher cost of capital, for either group, the perception of their ability to predict and control loss making events is key.

If you are not viewing the risk the same way as your lenders, you are likely to waste a lot of time hoping for capital solutions that may never materialize.

Before you approach lenders for capital,

  1. Identify key risk factors of your business,
  2. Identify lenders and debt products suitable for your risk,
  3. Control the narrative – proactively identify risks and your plans to mitigate them

The Cheat Sheet:

Use the following cheat sheet to quickly assess the type of debt products and lenders available to your business. This cheat sheet is relevant for middle – market, privately owned companies. While not a comprehensive risk analysis tool, the cheat sheet will help you target lenders that may provide capital solutions suitable for your business.

Combination of some of these factors can improve or worsen perception of credit risk, while private equity ownership may make lenders more flexible for a number of these factors.

Banks: National and regional regulated banks
Non-Bank Lenders: Private credit funds, SBICs or public or private Business Development Companies
CF: Secured debt structures dependent on cash flows of the borrower and enterprise value as a going concern
ABL: Secured debt structures dependent on cash flows of the borrower and appraised value of assets in the event of a liquidation
MEZ: Mezzanine or subordinated debt, which is unsecured, but is dependent on cash flows of the borrower and enterprise value as a going concern

Take Control of Your Capital

  • Identify key risk factors of your business,
  • Identify lenders and debt products suitable for your risk,
  • Control the narrative – proactively identify risks and your plans to mitigate them

In the traditional lending process, you:

  1. Give your firm’s info to the banker,
  2. The banker creates a narrative based on their perception and pitches to the credit committee, and
  3. The credit committee makes a decision.

This process is a classic game of “Telephone”

whereby you relinquish the control of the narrative and rely on the banker to position your deal.

You know your business better than anyone else, why allow someone else to position it for you? By understanding what lenders are looking for, you can proactively focus their attention on factors that can improve the perception of your firm’s risk.

CAPX can help you identify debt products, lenders suitable for your risk and help you position your deal to chosen lenders.

Designed for middle-market firms, CAPX is a digital marketplace that automatically and instantaneously converts capital markets data into valuable analysis. CAPX matches borrowers with lenders to secure $5MM – $100MM+ without having to call on lenders or sit through meetings.

 

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