The continued inability of businesses both large and small to obtain access to credit from commercial lenders is perhaps the most enduring aspect of the economic recession that began nearly two years ago. Obtaining a new line of credit, or extending or increasing an existing facility remains a very difficult task for even the most proven, creditworthy borrowers. Lenders are requiring borrowers to provide more collateral, abide by more restrictive financial covenants, and pay higher interest rates and fees than during the pre-recession days of looser credit standards. However, despite this historically difficult credit environment, there are steps that a prospective borrower can take to increase the likelihood that a lender will agree to commit to a loan, as well as possibly shortening the time period between initial discussions and funding, such as:

1. Borrowers should know their assets and their value.  Lenders now more often require all debts owed to a lender be secured by the borrower's assets, so prospective borrowers should have a recent and comprehensive listing of all real and personal property assets available to serve as collateral, including recent appraisals, ready for the lender's review.  Borrowers should consider its ability to obtain landlord or other lien waivers on such collateral, as well as the ability to grant the lender collateral access rights.

2. Lenders are requiring borrowers to comply with more restrictive financial covenants, and borrowers must be able to document the existence of more predictable and reliable cash flows to repay the loan.  Borrowers should prepare realistic revenue and expense projection models for review by the lender.  To help show a history of reliable cash flow, borrowers should have historical financial information organized and available for review.

3. Lenders may request personal guarantees or guarantees of a parent or affiliate entity, in lieu of or, in some cases, in addition to, asset collateral.  Borrowers should identify possible sources of such a guaranty, including founders, company principals, and key investors.  Be sure that guarantors also have proper collateral, cash flow, or assets to back up their guarantees.

4. Borrowers should consider offering the lender equity rights to make the business relationship more durable and further align the interests of borrower and lender.  Several equity vehicles can be employed, each with flexible terms, including convertible debt and warrants.

5. Borrowers should think of prospective lenders as a full-service financial institution, not just a source of credit.  Lenders may require borrowers to keep commercial bank accounts with them for purposes of security, and to permit lenders to monitor the cash flow of the borrower, but doing so also helps to enhance the borrower's relationship with the lender.  Additionally, wider utilization of multiple product offerings from the lender increases the likelihood of successful negotiations if a problem should later arise under the loan documents. 

6. Borrowers should have preliminary discussions with respected accounting/auditing firms early in the process.  Lenders are very likely to require that audited financial statements be prepared for the lender if a loan is made.  Borrowers should have a list of possible reputable audit firms on hand so that the Lender can gain comfort that the required financial statements will be prepared and audited in a timely manner once a loan is made.

7. Borrowers should consider seeking alternatives to commercial lenders, such as venture capital funds or hedge funds, if all possible conventional alternatives are exhausted.  Fewer equity investments are being made by these funds due to the current economic conditions, and as a result, some have begun to enter into the lending market.

Mark Tranovich is a partner at Oppenheimer Wolff & Donnelly, LLP in Minneapolis. He helps borrowers and lenders handle asset-based lending transactions, equipment and other lease financing transactions, consignment financing programs, debt financing transactions for both joint venture and start-up entities, and unsecured loan transactions.  He can be contacted by calling 612-607-7561 or by e-mailing mtranovich@oppenheimer.com.