- change ups
BDO exec sees several sources of capital for business
There is money out there for business loans, according to one executive at BDO USA LLP in Grand Rapids — but don’t make the mistake of looking for it when a loan has become the critical issue in the company’s survival.
That means developing relationships with financing sources before the money is needed, he said. Otherwise, a company that suddenly seeks a crucial loan will have lost some of its flexibility in the ability to negotiate with lenders, and it will have limited the potential number of lenders interested because memories of the bad loans that surfaced during the recession are still all too prevalent.
When BDO sees companies successful in pursuit of capital, it’s due to “long-term planning and a deep understanding of the available options” for financing today, he said.
Becker said active sources of business capital are private equity firms, private financing by outside investors, and banks.
As for banks, there has been an extended period of more restrictive lending, prompted by the losses on bad business loans during the recession, “but I do feel as though the market is headed back in a direction of being more open to bank financing,” said Becker.
“In general, banks are hungrier for business than they once were, more comfortable than they were a few years ago with leverage,” he said.
However, he noted that banks are still wary of certain industries — real estate, for example — “where we still see banks being very cautious.”
Banks are more comfortable doing deals in the manufacturing sector, Becker said. “However, it is still necessary to be able to demonstrate it has the capacity to generate cash flow to repay the loan.”
On the flip side of the equation, many manufacturing companies are wary of getting back into the kind of debt that sank many businesses during the economic downturn.
“That caution is often associated with trying to keep balance sheets as strong as possible, and strong balance sheets tend to have high levels of current assets, including cash,” said Becker.
Although he sees economic conditions, in general, improving in West Michigan, he said there still remains a lot of uncertainty stemming from the federal deficit and its impact on the national economy. “Because of that uncertainty, the manufacturing industry is still only willing to invest cautiously,” said Becker.
Business Leaders for Michigan also holds that view. In its latest economic outlook survey report this summer, the organization stated that the continuing European fiscal crisis, slowing global growth and the lack of a clear U.S. fiscal policy “are dragging down the economy. While our members remain bullish toward Michigan’s economic future and the optimism between how they feel toward Michigan’s versus the nation’s economy is actually growing wider, they project Michigan will not grow as fast over the next 18 months due to these macro-economic concerns.”
When asked about the auto industry, Becker said suppliers experiencing success are those that have products that add value, especially if the company owns a technology the automakers want.
“Organizations that sell products that aren’t truly value added are going to struggle, because any time the auto industry can commoditize a product or component, the pricing becomes ruthless, making it very difficult to generate positive margins of profit,” said Becker.
“We see a lot more private equity activity now than we did 10 years ago,” said Becker. However, it seems to be limited to companies that generate a minimum of $1 million in cash flow annually.
“I’ve not seen private equity deals below that level, but that doesn’t mean they don’t exist,” he said. He said there are probably fewer than 20 private equity firms based in West Michigan.
Of course, any business with the right connections has a chance of raising capital from private investors. While it is sometimes difficult to identify those sources, beyond the obvious friends and relatives, a private investor is often “more likely to accept terms and collateral outside the bounds of what is typically accepted by a bank or private equity alternative,” said Becker. That’s because a private individual may be interested precisely because she or he has a better understanding of the particular business or industry.
Questions BDO staff often hear from their clients relate to how a potential loan offer compares to the market place. Another common question, Becker said, can be summed up as, “Who else should I ask?”
“There are probably more sources than there were five years ago, but the sources are more sophisticated, more selective about the organizations with which they are willing” to make loans to, he said.