It’s a Borrower’s Market in Financing

For small-business owners planning to borrow money at every stage of a company’s life cycle, non-bank financing is increasingly an option. It’s easier than ever for business owners to find the money to pay for everything including growth and restructuring, thanks to competition from new sources and revamped offerings from finance companies.

GE Commercial Finance, a major player in corporate finance, recently merged its corporate lending programs and moved the new head of the program’s Western region to Los Angeles.

“We want to make more of a one-stop shop and provide a wider product offering locally,� said Andrew Waterson, managing director for the Western region of the Stamford, Conn.-based unit of General Electric Co.

The international finance company, with assets of $232 billion, has merged its commercial and industrial funding group, which provided structured finance, project finance and big-ticket equipment finance, into the corporate lending group, which had focused on asset-based and cash-flow lending.

The new corporate lending group will offer “cradle-to-grave� financing, including different types of working capital and long-term financing targeted at companies with revenue of $10 million and up.

Other parts of the finance company will continue to offer Small Business Administration loans, venture loans of less than $1 million to very early-stage companies in high-tech, as well as equipment financing and real estate loans.

We asked Waterson to give us his take on current trends in the lending market and explain some of the newest financing tools for businesses.

Question: How is the lending environment different today from two or three years ago?

Answer: It’s now a buyer’s market. The biggest change in the landscape over the last few years is the number of lenders and the amount of liquidity in the market. Today is a good time to be a borrower because there is too much money chasing too few loans. It’s a function of a lot of insurance companies and traditional investor vehicles looking for better returns, and safer returns, reviving the debt market. There are many non-bank competitors and hedge funds that have changed the lending landscape.

Q: Aside from easier access to money, how does lender competition affect borrowers?

A: Because lenders are plentiful, it gives companies the opportunity to choose a lender that brings more to the table than just a loan. Companies have the freedom to pick lenders who can add value.

Q: Will continued interest rate hikes temper the current “borrower’s market�?

A: The short answer is that it may have a dampening effect, but there are a lot of factors beyond what the Fed does with short-term rates that influence the supply-and-demand balance for corporate loans.

Q: What key trend do you see in corporate lending locally?

A: There has been an increased amount of merger and acquisition activity. Financial sponsors are creating liquidity for small, privately held companies. In the L.A. area, the service, technology and agricultural sectors are drivers for the economy, and there are many companies in those sectors who are looking for lending capabilities.

Q: What are the hot topics or needs for businesses in the Los Angeles area?

A: Growth financing is the primary need for L.A.-area companies. Also, companies value lenders that can provide the flexibility they need to operate in a dynamic, competitive economy.

Q: How is a loan from GE different from a bank loan?

A: We are not a regulated entity, so we don’t have the constraints a bank has. We are a finance company and we have a different culture because we are owned by an industrial company. We have a strategy of taking large “hold� positions because we are big enough to do so.

Because we are owned by the largest company in the world, by some measures, it gives us a big checkbook if we need it. Banks, because they are using your savings to make loans, have more regulatory constraints. Their legal lending limits are much smaller.

Q: Are there any new or innovative products GE is promoting in the lending arena?

A: The second-lien financing market has taken off in the last few years. It’s a hybrid between senior and unsecured lending, a bit like a second mortgage. Borrowers like it because it’s cheaper than raising new equity or even mezzanine financing, which is an expensive kind of debt.

It gives them a cheap supply of capital, and it’s more flexible than high-yield loans, which tend to have public reporting requirements. GE is one of the top few lenders providing this type of financing.

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Cyndia Zwahlen can be reached at [email protected].

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Corporate lending glossary

Here are definitions for some common corporate lending terms:

Asset-based loan: A corporate loan based primarily on the value of the borrower’s assets, such as inventory, real estate or equipment, in which the lender takes a first security interest in the assets. Asset-based loans can be used to meet a wide variety of needs including business expansion, seasonal cash requirements and acquisitions.

Cash-flow loan: A corporate loan based on the projected cash flow of the borrower. Companies that have more predictable and sustainable cash flows typically use cash-flow loans. These loans usually include restrictive covenants that spell out targeted financial ratios the borrower must meet.

Debtor-in-possession financing: Financing obtained by a company reorganizing under Bankruptcy Court protection. The lender assumes priority over other existing creditors.

Equity: Capital provided to a business generally in exchange for dividend and/or ownership rights, but otherwise unsecured.

Junior secured/second-lien loan: Similar to the typically more expensive mezzanine or unsecured subordinated loans, except that holders are granted security interests in assets already pledged to a senior secured lender. In some cases, certain assets will be pledged only to the second-lien lender.

Mezzanine financing: Subordinated debt that can serve as a bridge between senior secured loans and the issuance of equity. Often a borrower pays only interest during the term of the loan, with the principal due at the end of the term.

Project financing: A loan that relies for its repayment primarily on a project’s future cash flows, with the project’s assets, rights and interests held as secondary security or collateral.

Securitization: Enables borrowers to sell pools of assets (such as accounts receivable) to institutional investors as a way to raise money and lower their ultimate borrowing costs.

Source: Times research

Los Angeles Times