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Keys to Securing Strong Financing in Today's Muddy Banking Environment

Banks seem to be more reluctant to lend money than they were just a short time ago. This is a theme echoed among business owners seeking capital to fuel their still growing businesses or optimize their capital structure.

So, what has changed, and how does that impact a business's ability to obtain financing for an ownership transition?

Interest Rate Increases and Economic Uncertainty:

In its well-publicized efforts to combat inflation, the Fed has enacted an aggressive policy of interest rate hikes. The quarter percentage point increase announced on July 26 brought the target Federal Funds rate to 5.5%, the highest level in more than 22 years.

The increased borrowing costs have banks concerned about the overall economy and the increased cash flow burden on prospective borrowers.

Bank Balance Sheets:

In the wake of recent regional bank failures, including Silicon Valley Bank, renewed focus has been placed on balance sheet health of US banks. Unrealized loses on FDIC-insured institutions’ investment portfolios are elevated, while US banks lost $472B in deposits in the first quarter, according to the FDIC. Indeed, US bank deposits dropped the most they have in 39 years to start 2023.

Meanwhile, new rules proposed by the Federal Reserve, Office of the Comptroller of the Currency and the FDIC would increase the level of capital that banks with at least $100B in assets would be required to hold, which could mean a 16% raise in capital requirements for lenders. The proposal, which will likely see several iterations before becoming final, would not go into effect until 2028. However, it would require banks to appropriately scale back lending.

These factors play a role in today’s more challenging lending environment, as banks become more selective in their lending practices and look to conserve capital. The impact can be felt especially strongly in historically cyclical industries and others that are exposed to political or social pressure, like the energy sector.

And yet, many business owners are still finding the financing support they need to transition and grow their businesses. So, what are the keys to securing strong financing in a muddy banking environment?

A Real-Life Example

For Middle Market businesses looking to enhance or expand their financing options, there are strategies to boost marketability as a borrower. To help illustrate, here is an example of a recent Lazear client that found success obtaining strong financing despite being in a hard to bank market segment.


Lazear was engaged to execute a new ESOP formation for a business that provides critical services to the coal mining industry centered around the Powder River Basin (near the Wyoming-Montana border). The client was a 40+ year business without experience obtaining or using bank debt.

The primary challenge in obtaining financing for this client was that the vast majority of their customers are focused in coal mining and production. Being adjacent to the coal industry without a strong incumbent bank to rely on seriously limited financing options. However, with a strong financial profile and a premier reputation within their field, there was a lot for a prospective bank to like! It was just a matter of presenting the client in the best manner and getting their story in front of the right banks.

For companies looking to obtain financing for ownership transitions, business expansion, or general liquidity, here are a few tips to help attract the right banking partner and how Lazear looks to address each.

1. Improve Financial Transparency: Maintaining consistent financial records, cash flow projections/budgets, and CPA reviewed or audited financial statements can boost transparency and give lenders confidence in a businesses’ financial stability.

Example: The Company’s internal financials were consistently tracked but difficult for outsiders to analyze and compare period over period. A highly reputable CPA firm was recommended and engaged to provide a first-time consolidated audit of the financial statements.

Simultaneously, Lazear worked with management to:

  • Summarize and present historical financial statements in a manner that is conducive for banks to analyze

  • Proactively mitigate possible financial or business concerns

  • Provide a Confidential Information Memorandum and bank-specific add-on presentation outlining key aspects of the company, transaction, and strengths of the business

This thoughtful analysis and presentation made it easier for a larger number of banks to quickly and accurately determine their ability and desire to lend, leading to a stronger outcome and fewer dead ends.

2. Highlight Industry Expertise and Experience: Demonstrating in-depth knowledge and expertise within the industry can help businesses gain a competitive edge, making lenders more confident in the business’s ability to navigate challenges and succeed.

Example: The company had been in operation for over 40 years, with an experienced and impressive management team. In its communications with potential lenders, Lazear emphasized the quality of management, the critical nature of the company to its clients, and the company’s past ability to successfully manage through down cycles.

3. Build Strong Banking Relationships: Cultivating long-term relationships with banks can foster trust and familiarity, leading to a better understanding of the business's financial health and increasing the chances of securing strong financing. Engaging with a partner who is deeply ingrained in the lending market can also lend credibility to a business’s financing requests.

Example: With no prior banking relationships for the company, Lazear leveraged its network of trusted lenders to engage banks that would fit best with the company’s funding and growth goals. Ultimately, Lazear contacted 35 banks to find a handful that fit the bill in terms of size, industry appetite, and funding ability. Lazear’s strong relationships and past transaction experience offered additional comfort to Lenders that information was accurately portrayed.

4. Diversify Funding Sources: Businesses should explore alternative funding options such as asset-based lending (ABL), real estate debt, and innovative line of credit structures in addition to traditional term loan options. Optimizing debt composition can often reduce borrowing costs and enhance terms.

Example: Lazear explored several debt structures to find one that aligned the company’s interests with the bank’s. To achieve this, the structure incorporated real estate owned by the shareholder, a term loan partially secured by equipment and vehicles, and a working capital line of credit. The improved collateral composition allowed for lower interest and more favorable amortization terms, helping the company comfortably manage transaction-related debt.

Terrific outcomes require effort and thoughtful consideration. What sets Lazear apart from other investment banks is our creative and intentional problem-solving approach, combined with our high-quality network of banking partners.

If you are seeking financing support for your business, don't let the current banking environment discourage you. With the right approach and the right partner, you can secure excellent terms.

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