Have you read your loan docs lately?
It's no surprise that banks have all but stopped lending unless the borrower is of such low risk that even a bank examiner would have recommended the loan. The credit crunch is far from over and a hard market for leveraged lending will persist for the foreseeable future. Loans to agencies always have fallen under the broad definition of "leveraged finance"--cash-flow based loans that are not supported by hard asset values or balance sheet equity and reflect intangible factors such as "enterprise value."
Bankers run from these types of loans in times of tight credit. Worse, if the bank is under any pressure from problem loans, it will look to exit these relationships lest they be criticized by regulators, even if the business never missed a payment. Unless your bank specializes in these loans, you may have a difficult time maintaining credit.
Borrowers often are their own worst enemy, giving banks the opportunity to call a loan by breaking, or not adhering to, loan covenants. These are the promises in loan documents borrowers make to banks. They can take the form of affirmative covenants, in which a borrower agrees to keep promises such as producing sufficient cash flow to repay the debt, with an adequate cushion, and supplying financial information. Documents also contain negative covenants--promises that a borrower agrees it will not break, such as changing the composition of owners, paying dividends, taking distributions and incurring additional debt. A business can trigger a loan default by breaking a promise from either category.
Right now, many agency accountants are compiling or reviewing annual financial statements. These will be delivered to bankers who will scour the contents. Before delivery, agency owners should carefully interpret the financial results and the potential impact on the loan.
Review the financial statement with regard to the loan covenants. If there is a debt service covenant, calculate it to measure compliance. Share the calculation with the banker in a cover letter with the financial statement State that you reviewed the loan requirements and determined that it is in compliance. Sign both the letter and the financial statement--something that often is overlooked, particularly in the age of e-mail and faxes. The extra step of attending to the certification of compliance in a letter demonstrates a degree of financial responsibility and knowledge of the business. Your banker will appreciate this.
Pay particular attention to some of the occurrences that may make financial statements appear weak. Has an owner made a withdrawal or dividend that caused a debt service covenant violation? Present a plan to the banker to repay this draw promptly and reinvest the funds as capital or a subordinated loan. Are accounts receivable extended? Have company payables been reconciled? Are you properly recognizing direct-billed commission receivables? Is the agency in trust? If your accountant recommended that the business strip cash out of the business at year end, you may want to consider finding a new accountant. If there is a weakness in the financial statement or a non-compliance with the terms and covenants of the loan, inform the bank immediately, and with a plan to cure the deficiencies. Don't compound the problem by surprising your banker.
Agency principals must realize the importance of maintaining their financial standing and credit availability with their lenders to take full advantage of opportunities for growth.
By ROBERT J. PETTINICCHI, executive VP and chief loan officer, InsurBanc
Robert J. Pettinicchi is executive vice president and chief lending officer of InsurBanc (www.lnsurBanc.com), a federal thrift dedicated to providing banking products and services to independent insurance agents.