Our friends at Revitalization Partners help companies make better decisions about business operations. This blog from their newsletter takes a look at eliminating preconceived notions, not hiding from the truth and not being driven by fear or ego in your business. As leading private money lenders at Juniper Capital, we are committed to sharing business advice that helps you achieve success. We offer hard money loans, private commercial real estate loans, private construction loans in Seattle and other cities across the Pacific Northwest and more:
Sometimes companies find themselves on the wrong track. Whether due to flawed strategy, incompetent management or even just a handful of small glitches that threaten to bring down the entire enterprise, some businesses just need to make a rapid and significant change to survive. And that requires a thoughtful change from the owner or senior manager of the business.
One company we worked with was in a very cyclical industry. Over the years, they had operated with a working capital loan from a California bank and eventually purchased another company in the same industry using an SBA term loan from the same bank. During a couple of down years in the industry, the California bank decided that they wanted the company to find another bank as the company had been in technical default for over a year. The bank was being very reasonable in agreeing to support the company while they searched for replacements for both loans.
Due to having two years of very cyclical operations, the company’s financial statements reflected the nature of the performance. As a result, it was difficult to identify a single bank that was willing to assume all the risk. While we were searching, the California bank issued quarterly forbearance agreements, while at the same time tightly controlling the amount that could be used by the company as working capital. In addition, the bank fees and costs of obtaining the forbearance represented a significant drain on the cash of the company. However, we were able to obtain two separate loans that would support the company at the level they needed.While the term loan was secured by real estate, the working capital loan was viewed as having more risk. While the working capital lender was beginning their due diligence, the borrower, as business improved, decided that the loan was more expensive. He had located a bank that he believed would make the loan with lower fees and a lower interest rate.
While the term loan was secured by real estate, the working capital loan was viewed as having more risk. While the working capital lender was beginning their due diligence, the borrower, as business improved, decided that the loan was more expensive. He had located a bank that he believed would make the loan with lower fees and a lower interest rate.
The California bank, however, wanted out of this loan and it had taken over a year to put these two loans together. As an incentive, the California bank tripled the quarterly loan costs of the forbearance agreement.
Our discussion with the borrower indicated that the bank he had found was going to close the working capital loan “any day”. The term loan provider was ready to close as soon as the other lender was. Another several months went by with all the costs of the quarterly forbearance agreement.
Then we learned, from the lender that we had identified approximately a year ago that they had closed the loan with the borrower. Had the company owner taken the experienced advice that he had paid for, several hundred thousand dollars could have been saved and available to use in the company.
There are some lessons here that are useful for any business:
- Don’t be driven by pride of fear. When things are going wrong, too often management has too much pride to admit their mistakes. In this case, management felt that they knew better than the company they hired to find them a loan. Additionally, they believed that the owner had developed a relationship with this lower cost bank that trumped banking rules.
- Do not hide from the truth. Despite the comments of their existing bank, the experience of RP and the comments of the banks that we spoke with that rejected the loan, the owner of the company believed that he knew things that everyone else didn’t. Banks want to make loans. When they decline to and provide logical reasoning regarding the risk associated with a loan, then are certainly telling you the truth as they see it.
- Eliminate preconceived notions and become a blank slate. Management was sure that the California bank was going to foreclose on the loan. As a result, the longer the process took, the more that the bank wanted to mitigate the risk. The “delay” in accepting the loan that was put forth originally caused the bank to become more concern, increasing fees and costing the company far more than it was attempting to save.
In most business and personal situations, eliminating preconceived notions, not hiding from the truth and not being driven by fear or ego, is the beginning of the path to solving problems and to saving you from yourself.
Revitalization Partners is a Northwest business advisory and restructuring management firm with a demonstrated track record of achieving the best possible outcomes for our clients. They specialize in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations.