How to Tell a Company's Credit Story to Secure the Capital You Need
What if a company's financial results are subpar? Can I still get the financing I need?
Thursday 30 March 2023
What if a company’s financial results are subpar? All companies go through cycles and experience varied financial results. This doesn’t mean a company cannot borrow the capital it needs when it needs to. How the company’s credit story is told is critical because it sheds light on how strong the management team is, what actions have been taken to mitigate external and/or internal risks, and how the company is being managed through difficult business cycles. Telling an effective company story is not about downplaying negative results; in fact, it’s just the opposite.
PerCina Report’s Digital Investment Memorandum Solution and Credit Analyst Ecosystem will help credit analysts and deal syndicators position a company and its management team appropriately. Regardless of the company’s results, effectively presenting the organization’s situation requires a complete, accurate, compelling, and forward-looking story. Lenders invest in management teams, not companies. Even if the company has negative results, lenders may still be won over by a “tough story told well.” Why? Because it reveals the real strength of the leadership team. Yes, in these situations, a lender may be able to benefit from additional terms and conditions, but the company secured the financing it needed.
PerCina Report provides a step-by-step guide to the questions and data that lenders and funding sources require to lend money to a company. As questions are answered, be sure to clearly define the company’s mission and values—investors want to know what drives the company and what sets it apart from competition. Clearly articulate the company’s mission and values to help investors understand management’s vision and what company leadership stands for. Some tips to consider:
- Highlight the company’s accomplishments. Don’t be shy about emphasizing the company’s achievements and successes. Even if financial results have been less than stellar, investors will want to see that the company has a track record of success and is capable of delivering results. For example, the company may have poor bottom line results, but this could be because it currently has a high cost of capital yet it is successful rolling out products or driving market share. A larger line of capital, adjusted for rate over time, with success can be very attractive to lenders.
- Discuss the company’s value proposition. What makes the company’s products or services unique and valuable to its customers? Be sure to highlight the company’s value proposition and explain clearly how it sets the company apart from competitors and is defendable.
- When presenting the company’s financials and forecast, provide a solid and reasonable growth plan. Lenders want to see that the company has a clear and well-thought-out plan for how it will use the capital to grow and sustain its business. Additionally, the company’s financial assumptions (whether they be on costs, sales, margins, customer contract renewals, etc.) need to be very solid and realistic.
- Identify critical, and ideally recurring, sources of revenue for the company. If a company has contracted revenue, be sure to highlight this. If a company operates in a market where revenue is generated only from customer purchase orders, and is short term in nature and not recurring, be sure to communicate this as well, but also highlight that this is the industry norm and competition operates in the same manner. Now the company can highlight the strength of its relationships, the advantages of using its products or services, and why customers have and will continue to do business with the company.
- Be sure to discuss the debt of the company (often captured in a capitalization table or report) where critical debt maturities are reported. If the company has a major refinancing of debt that is scheduled to occur during the new lease/loan term, this must be addressed up front. If the company already has financing lined-up, be sure to illustrate this with the respective term sheets. If not, be sure to list the names of the banks and capital providers the company is currently negotiating with or plans to speak with regarding refinancing the maturing debt facility. Lenders understand these situations well, but if the company doesn’t address this up front in the discussions, then every aspect of the company’s performance will be further scrutinized by lenders.
- The objective should be to get an audience with as many lenders or investors as makes sense. Show enthusiasm and passion: Lenders and investors want to see that company management is passionate about their company and its mission. Show enthusiasm and convey excitement about the future of the company, but be realistic about opportunities.
- No management team is perfect, so be sure to address issues and risks in the business before a lender asks the question.PerCina Report provides an extensive list of business risks gleaned from decades of experience lending to companies. More importantly, PerCina Report shows you how to address any company risk in a manner that conveys how a management team should respond and what lenders are typically looking for to see that the risk is addressed and will not be a factor going forward.
- The “lending formula” is not overly complex in most situations. PerCina Report guides you through this process:
- Can company revenue be generated consistently and sustainably?
- Does the company generate margins equal to, better, or below the market it competes in?
- Will there be ongoing demand for the company’s products or services? And could this occur through different business cycles?
- Does the company generate enough operating cashflow to run its business and meet its obligations?
- How is the company capitalized? Is it managing its debt facilities, and thus working capital, adequately enough to meet all of the above?
- Is the asset being financed critical to the company’s operations (either revenue generating or cost saving) so that it will be required even during a downturn in the economy?
- Is the company’s management team and ownership suited to the mission of the company and its obligations?
PerCina Report's team and advisors possess decades of lending experience with many of the world’s largest banks and financial institutions involved in commercial lending, and have collectively reviewed, underwritten and syndicated thousands of deals—each detailing the story of a particular company. Many of the team worked at GE Capital where, in its lending businesses, they would review hundreds of deals each year. At every weekly pre-investment committee (PIC) meeting, deals were presented to management and then pre-screened or decisioned. How the deal’s “story” was presented was critical—especially if the company was generating negative financial results.