Not that it’s ever easy, but business owners have a greater array of options than ever when seeking financing for their companies.
From private investor capital to bank debt, businesses with a good track record should have the ability to secure what they need, according to local finance professionals. In particular, they describe a highly competitive market right now in West Michigan for commercial loans and private equity investments.
“Good companies have a lot of options, whether it’s equity or debt,” said Matt Miller, managing director at BlueWater Partners LLC in Grand Rapids who works with businesses on financing.
Miller describes the present environment as “probably at or near a high in terms of availability” for capital.
“Banks are competing vigorously for new or expanded loans and credit facilities, and equity groups are competing quite aggressively for recaps and buyouts and acquisitions,” he said. “A good company with a good balance sheet and earnings — and good management — should have lots of alternatives.”
As banks take a more aggressive lending posture after repairing their balance sheets in the wake of the recession, Miller and others say they are often able to provide clients multiple loan proposals from prospective lenders in the market, whether to finance growth or an acquisition.
Jeffrey Terrill, a senior vice president at Citizens Commercial Banking who works in the mid- to upper-middle market, describes putting together the financing package for the 2015 sale of Holland-based JR Automation Technologies LLC. The manufacturer of custom automation equipment, and previous portfolio company of Huizenga Group in Grand Rapids, sold to Crestview Partners, a New York City-based private equity firm.
Citizens Bank and Bank of America were underwriting the deal and wanted to syndicate it to mitigate their lending risk by inviting other banks to participate. At a meeting in Holland on a snowy day last February, representatives from 16 banks listened to their pitch.
“The deal ended up oversubscribed and we had more banks than we needed,” Terrill said, illustrating the level of competition by commercial lenders to get in on a good deal.
“I’d love to be sitting at the other side of the table,” he said.
The competitiveness in the market also has made banks more able to partner for larger commercial credits. During or right after the recession, it was virtually impossible to get a partner to come into the market to share the credit risk on a large loan, said United Bank of Michigan President Mike Manica.
The Grand Rapids-based United Bank now regularly receives inquiries from out-of-state lenders seeking to partner locally, Manica said.
“That’s back to normal. We have partners and bankers’ banks calling on us fairly frequently, wanting to do business with us and our commercial customers,” Manica said. “A lot of places have accepted Michigan’s rebound, and they are interested in re-establishing themselves in Michigan.”
LOOSENING OF TERMS
A high level of competition enables a borrower to become more selective in choosing a credit provider, whether they are basing the decision on price alone or considering other factors, such as the long-term business relationship with a bank and the services it offers as the borrower grows.
“It comes down to fit in lot of cases — the personalities and the culture of the parties, the bank and the borrower, and the relationship where they feel like they can work together, especially if problems arise,” Miller said. “We would advise our clients to look beyond just price.”
The present competitive landscape has resulted in slightly better and more favorable credit terms compared to a few years ago, although that depends on the circumstances of the borrower and the lender involved, experts say.
The current market dynamics are driven in part by the moderate growth rate of the U.S. economy. That tempers demand for credit, forcing bankers to get more aggressive for good loans to drive their growth and compete for a limited number of borrowers out in the market.
At the same time, publicly-held banks face pressure to grow at a faster rate than the economy, intensifying the competitive environment.
“You’re not going to find a bank that says it wants (fewer) deals than it did last year,” Terrill said. “We have to show improvements to the shareholders every quarter.”
Adding to the competitive pressure for lenders: Some business owners who navigated through the Great Recession are more apt today to pay for capital purchases partly or fully with cash, rather than tap a line of credit as their first option.
In part, that’s because business owners harbor lingering worry about when the next economic downturn will occur, Miller said.
The Great Recession “has definitely left some scars,” he said. “It’s been so etched in our memory banks that I think people are just a bit more cautious still many years after.”
Some business owners today, even with forecasts for moderate growth to continue this year and next, prefer to wait as long as they can before proceeding with an expansion or a major capital equipment purchase.
Lenders at United Bank of Michigan, which typically lends to small and mid-sized businesses, have seen some clients operate as close to full capacity as possible before expanding.
“They’re confident about their current situation, but they don’t seem to have that entrepreneur’s confidence that five years from now it’s going to be even better, yet they have orders they cannot produce with their current size,” Manica said. “There are still a lot of scarred people from the last eight years and they are being conservative, and probably appropriately so.
“They really want to let the reins of the horses go, but they can’t do it.”
Still, Manica added, commercial lending at United Bank is “very busy” right now and the competition remains high, requiring banks to give borrowers a “reason why they should change (banks) and how you’re going to help them, rather than (be) just a pretty face and a good handshake.”
Likewise, several banks in their most recent quarterly reports last fall reported strong commercial loan growth for the July-to-September period in 2015.
Experts say banks are particularly competitive in seeking to finance a merger or acquisition.
In the annual M&A survey by law firm Dykema, more than 44 percent of respondents reported an increase in commercial or institutional debt financing for their deals in 2015. About 28 percent used more subordinate debt finance to structure a deal last year.
Jeff Helminski, a managing director at Grand Rapids private equity firm Blackford Capital, said his firm continues to have plenty of options to finance acquisitions.
“We’re seeing a lot of appetite for our deals,” Helminski said. “Banks are eager to place capital.”
Finance professionals who spoke with MiBiz on the current state of the market say business borrowers not only have more options from banks, but also from alternative finance sources as well.
Mezzanine financing and subordinate debt is more available today — both from in-state and out-of-state lenders — for fast-growing companies that need growth capital, experts say. In-state mezzanine funds, however, are not growing as quickly as private equity, Miller said.
As an option, mezzanine funding works best for business owners who are looking at high growth prospects, need capital and don’t want to give up an equity stake in the company, Miller said.
“It really fits with companies with strong profits and growth and good prospects — companies with strong competitive positions (where) the bottom line is very profitable, and with a brave future,” he said. “Mezz doesn’t work very well if things get bumpy.”
For small businesses, credit unions have been increasingly aggressive for years in their commercial lending to members. Statewide, business loans to members by credit unions in Michigan exceeded $1.6 billion at the end of the third quarter of 2015, up 15 percent from a year earlier, according to data from the National Credit Union Administration.
“They’re active in the market and they’re seeing good deals and not-so-good deals,” said Remos Lenio, a partner at merchant and investment banking firm Tillerman & Co. in Grand Rapids. “I’ve seen them do some well-structured, well-priced stuff.”
So-called peer-to-peer and unregulated lenders backed by private investors are becoming “very aggressive” in the market as well, Lenio said.
More small business owners are also willing to look at U.S. Small Business Administration lending programs for credit, said Mark Matis, chief lending officer at Grand River Bank in Grandville.
SBA-backed lending, which in Michigan totaled more than $140 million in the first two months of the agency’s 2016 fiscal year, could get a boost with a recent change in the law. A spending bill passed by Congress in December and signed by President Obama permanently authorizes small businesses to use the SBA 504 program to refinance existing debt.