Seeking Best Loan Terms Extends Beyond Lowest Rates

Entrepreneur’s Notebook

by Mark Hafner

While some companies operate on the principle that a product or service always will be bought on the basis of price, other factors are important too otherwise Neiman Marcus, Mercedes Benz, Four Seasons hotels or J.P. Morgan would be out of business.

When looking for a lender or other financial provider, it is tempting to choose the lowest price, though it might not be in your best interest. Indeed, comparing lenders based mainly on the interest rate quoted does not tell the whole story. There are other factors to consider.

– Strength of Relationship: How important will your business be to the lender? Will you be one of the smallest or the largest customers? Will you have access to the decision-makers? Will the lender be there if the business gets into trouble? And will the lender provide extra service or just the bare minimum?

– Capability to Expand Credit Line: Will the lender grow with you and help take advantage of new opportunities?

– Flexibility to Alter Terms and Conditions: Will the lender provide over-advances or side loans from time to time?

– Reaction to Shortfalls in Projections: Will the lender be open to restructuring the credit facility and help work out a plan, or will the lender just ask you to leave when things get tough?

– Covenants and Restrictions: Will covenants make it difficult to run the business the way you want? Will the lender assess fees or increase rates if covenants are broken?

– Effect of Change in Lending Officer/Contact: Who will handle the day-to-day relationship? Is the main contact backed-up by others? Will management be involved in the relationship?

– Administration and Reporting: Does the lender provide on-line reporting capability? What specifically are the daily and monthly reporting requirements?

– Overall Comfort Level: Do you get the sense that the lender truly understands your needs? Does the lender do what they say they’ll do? Is the lender responsive?

While it may be difficult to measure the impact of some of these factors in the beginning, it pays to do as much analysis as possible before a lender begins the due diligence process. In your analysis, you may come to find that some of the lower-cost providers have more restrictions than you would like or they may require you to come up with more money up front.

For example, a lender may require a certain amount of excess availability (a dollar amount you must keep available after funding). Or that payables be kept at 60 days, or you obtain an opinion letter from an outside attorney (that can cost anywhere from $15,000 to $25,000); or that a cap be placed on your salary; or that you pay off an old, low-cost debt.

Each of these possible requirements needs to be weighed and evaluated against consideration of the interest rate. In some cases, you’ll find the conditions a lender placed on the deal may actually wind up costing more than they save by choosing a lower interest rate, or the conditions actually hinder your ability to run the business. That in itself may be too high a price to pay.

Also consider the term length each lender proposes. Some lenders try to lock customers in for three years; others will write six months or one-year terms in an effort to help return to more traditional (and less expensive) bank financing sooner as opposed to later.

Another important factor to evaluate, especially if you need financing quickly, is whether the lender will still want to do the deal when they’re finished with the due diligence process. Sometimes, deals that are on the low end of a lender’s financing range will be turned down after audit just because the decision-makers feel they’re too small.

As it’s generally a business development person who has made the initial proposal to you, try to get some kind of commitment up-front about the true decision-maker’s willingness to move forward. You don’t want to spend needless time on a lender who may not truly be committed to your needs.

Remember, “lowest price” may not equal “best value.” It pays to look beyond an interest rate comparison in order to find an asset-based lender that best meets your financing needs.

Mark Hafner is president of Celtic Capital Corp. He can be reached at [email protected].

Entrepreneur’s Notebook is a regular column contributed by EC2, The Annenberg Incubator Project, a center for multimedia and electronic communications at the University of Southern California. Contact James Klein at (213) 743-1759 with feedback and topic suggestions.