KATHMANDU, July 20: Even as businesses stretch their resources to cope with issues like sluggish economy and increased corporate oversight, they also face dramatic shifts in their relationships with their lenders. Driven by market and regulatory forces, lenders are reassessing their appetite for risk, showing a greater willingness to either cut financial ties or impose heavy transaction fees. However, by keeping five interrelated principles in mind, borrowers can significantly improve their chances of making a good match of their business with lenders.
Know your bank’s business philosophy
Banks are highly regulated, while many non-bank lenders (with the exception of institutions like insurance companies) generally have less oversight. This gives non-banks some operating advantage, since they have more freedom in capital reserves and other areas. But at the same time, some customers gain comfort from the implied safety of a heavily regulated institution. A high level of regulation can mean an inhibited ability to innovate, and an inability to understand the way a particular business is managed.
Before one signs with a lender, business must make sure that it understands the lender’s operating philosophy. Does it take a business approach to banking, or a banking approach to business? The difference is significant, particularly if the company needs flexibility in its covenants, or an increase in its borrowing capacity.
A financial institution, on the other hand, should think strategically to understand the needs of a customer.
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Make sure the lender really wants to make the loan
Some banks may extend a loan to your business, but their long-term intention may be driven by the prospect of selling high-profit, ancillary products to your company. Business should be clear that the debt facility is the institution’s primary concern, rather than other fee-generating activities that should be separable from the loan.
From the lenders’ perspective in Nepali financial market, banks will provide credit protection at the expense of loan activity. Banks will start making careful calculations of risk-adjusted returns on economic capital and will find that the risk-adjusted returns on most loans are not sufficient to make their shareholders happy.
Make sure the lender has adequate depth and capacity
In order to properly serve a customer, a financial institution should have a deep, broad understanding of its borrower’s business, the expertise to structure a transaction that meets the customer’s needs, the desire to work with the customer on a long-term basis, and the ability to articulate all of this in a way that makes business feel comfortable. The lender should be able to call upon intellectual resources that include a comprehensive, cross-industry knowledge base, enabling it to meet the business’s timeline and other needs.
Look for a lender that wants to build a relationship, not just a transaction
True “relationship banking” is important to the success of a borrower’s relationship with its lender. For borrowers, it’s very helpful to be able to pick up the phone and speak with someone who knows their business. Such a relationship may help the borrower to get over some rough spots. However, that many borrowers abandon this approach when money gets tight. Even though there are long-term benefits to working with a relationship-oriented lender, many companies just focus on interest rates during a difficult economy.
It is very important to determine whether or not a lender can add true value to the business.
Consider all costs related to your debt
For many borrowers, choosing a lender often comes down to simply looking for the most attractive interest rate. But that approach may actually result in higher overall costs. The key is to consider all of the costs involved in the debt facility, not just the stated interest rate.
For example, the final price of a syndicated transaction is determined by the market, so if a lending institution does not have solid syndication capability or the transaction isn’t structured properly, the loan may have to clear at a higher price, wiping out any savings delivered by a seemingly cheaper proposal or “term sheet” interest rate.
The value of a lender’s knowledge and other added services might also be factored into a borrower’s true cost of capital by considering the value that can be added (or potentially deducted unwittingly) on income statement lines other than interest expense.
The author is thefounder and executive chairman at Kathmandu Frontier Associates (KFA).
