As established small and midsize companies, particularly manufacturers, look to grow, many of them run into challenges accessing traditional business loans from banks. But thanks to a host of alternative lending programs, including a new state-sponsored mezzanine fund, bankers like Fifth Third’s Brian Black are finding new ways to help companies get the funds they need without having to give up equity in their businesses. Black spoke with MiBiz about how the bank is working in particular with manufacturers in the automotive supply chain as they navigate cash flow issues related to tooling up for new vehicle launches.
Banks tightened their lending criteria in the recession, especially with manufacturers. How would you describe the lending market now?
I think that, in the banking business today, we are back. The banking industry is being viewed by Wall Street around earnings growth and a big driver of earnings growth is loan growth. All the banks are really focused again on growing loans. I think it really has come back very significantly. We don’t hear from anyone anymore that banks aren’t lending.
We’ve heard that too, but auto suppliers say you’re asking more questions of them these days. What do you need to know before you’ll lend them money?
We’d be very interested in understanding the model lines that the products are going to go on. We would do quite a bit of analysis around that and what some of the historical trends are relative to the model years — and relative to how many pieces are going on a (vehicle) — and really substantiate their projections.
What’s your biggest concern when evaluating credit applications from the suppliers, many of which have to add capacity to keep up with increased demand?
Capital is a big issue. Are you adequately capitalized to take on this additional opportunity? Because if they’re not, frankly, they have to turn down what might be some good work for them.
How healthy are the companies you’re dealing with?
Clearly, it’s vastly improved over the last few years when a lot of suppliers struggled to make it through. The good news is that the really weak ones went away, and so the ones that have the staying power to get through some lost years, some significant drop in volume, have adjusted.
What options are there when traditional debt still doesn’t make sense?
Oftentimes, when you’re talking about additional funding for engineering or tooling built up for future projects, there’s not a lot of collateral value in that. The common denominator is how do you bridge that collateral gap. We would often use the Michigan Economic Development Corp. Collateral Support Program as a way to bridge that gap. The state would come in and support that collateral shortfall.
Fifth Third pledged $6 million for the new Grow Michigan fund. What does this mean to suppliers?
Oftentimes, for borrowers, the last thing they want to do is give up equity. Those are the choices that they come to. Can I get the debt? If I can’t get enough debt to meet the opportunity through these new programs, I certainly don’t want to give up piece of my company to get there. That’s oftentimes where they’ll (take a) pass.
What’s the tradeoff for choosing mezzanine or subordinated financing offered by Grow Michigan?
It’s a little more expensive than bank debt would be, but they’re not giving up equity. In that case, the return on their investment would still make a heck of a lot of sense. It would allow them to say yes to the opportunity.
How will the program help with that funding gap?
This Grow Michigan Fund is actually filling a void in the market that hasn’t been available to particularly the smaller businesses. There’s always been mezzanine around, but the more typical ones never do the mezzanine piece itself below $5 million. A lot of our suppliers and a lot of the ones that have a more difficult time funding these opportunities are going to be on the smaller end — maybe companies up to $50 million in sales. The MEDC programs and the Grow Michigan program and even the SBA, to some degree, are opportunities to help people actually get to that next level where they might not be able to otherwise.
Interview conducted and condensed by Joe Boomgaard.