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SanSegal Sportswear has thrived in Utah for 33 years. But last November, the company was left in a quandary after its lender pulled the rug out from under an $8 million line of credit.
“They told me in mid November, ‘Don’t get excited about a renewal because there is not going to be one,’” says Macon Rudick, a partner in the SanSegal business. “They hadn’t even seen SanSegal’s 2010 financial statement.”
After a six-and-a-half-year relationship with the bank, Rudick attributes the non-renewal of his credit line to frozen credit markets and a paradigm shift in business lending. As best as he can tell, what’s going on in the commercial lending world is a matter of economics: “Yes, the banks have money to loan, but if you don’t need $10 million or up, they won’t even call you back,” he says. “And without financing, most companies would be out of business.”
During the ensuing months, as SanSegal shopped for a new lender, it appeared the company might need private equity or perhaps a merger with a competitor in order to survive. However, a contact in North Carolina referred the company to TAB Bank, an industrial bank headquartered in Ogden. “We were successful in getting TAB Bank to complete a loan agreement for the $8 million, replacing our previous line of credit with equal or better terms,” Rudick explains.
Eric Myers, director of marketing for TAB Bank, says the lender has found a niche market picking up commercial borrowers that traditional lenders don’t want. In fact, many of its 300 customers have come to TAB Bank for that very reason—traditional lenders didn’t want them.
“We get a lot of looks from businesses because traditional lenders are not comfortable with the lending situation anymore,” he explains. “I believe a lot of the changes in the lending environment have to do with more stringent application of FDIC regulations, which makes the commercial lending industry nervous. It’s like Washington is saying, ‘Please make more loans,’ and the banks are saying, ‘You don’t want us to make any bad loans.’ Since many customers don’t fit today’s lending criteria, they are finding it difficult to borrow money.”
Wadsworth Construction President and CEO Kip Wadsworth says his 15-year-old real estate development company didn’t get sent packing by its traditional lender, but he has found that commercial lending has changed nonetheless. “Banks aren’t willing to take the risks they were before. They got burned, and many still remain under pressure from regulators for their previous lending decisions,” he says.
Has there really been a credit thaw? Wadsworth says it’s tough to get a loan unless the business already has a strong relationship with the lender. “Traditional lenders are less likely to work with businesses they don’t know and trust. Fortunately for us, we have had a couple of those established relationships. It hasn’t been as difficult to borrow money, but lenders are definitely putting on more requirements,” he explains.
For example, in the real estate development market, lenders want more pre-leasing. “They are requiring 50–70 percent of space be preleased before the long-term lender will give you a loan,” he says. “It’s all based on the risk they see. They want to be sure you have enough cash flow coming in to pay the debt. Such significant preleasing wasn’t a requirement before.”
Furthermore, he says lenders have toughened their liquidity requirements. They want to make sure the borrower has liquidity in his or her investments. And they are conducting more stringent reviews of financial statements—digging deeper into the details until they have a clear picture of business financials. But that’s not all. Lenders are scrutinizing appraisals more closely, and are even requiring more personal guarantees.
“In the past, to build an office building, we would go to the lender and say we wanted a 10-year loan, borrowing 75 percent of the building’s value. The only collateral would be the office building itself. Now, the lenders are saying, ‘You guys, as owners, must personally guarantee this loan will be paid.’ And the personal guarantee might be 30, 50 or 100 percent of the loan amount—it’s all based upon the risk they see,” Wadsworth says. Indeed, he doesn’t believe there are many loans going out—at least in the real estate development business—that don’t have some kind of a personal guarantee requirement.
Overall, he says lenders want a more complete financial picture. “They want to be sure the borrower has liquidity; they want documentation that is complete and accurate, and not just on the business, but on the guarantors as well; and they want personal guarantees.”