You’d Think The Financing Would Be A No-Brainer…
You have finally found the perfect sites with great traffic counts, high visibility and limited competition. Permitting is secured, twenty-year land leases are in place, and advertiser interest grows every day. The situation is as good as gold. All that is needed now is simple financing so the project must be good to go, right?
Well, maybe not….
Simply stated, getting proper financing in place is not an easy task and can still undermine a project even with everything in place. There are a lot of variables to consider. In order to better understand how to navigate the financing maze, it is helpful to first break down the financing sources into basic groups:
- Local banks – This group tends to be the cheapest with respect to interest rate, but conversely they are often the most limiting. They often do not understand the key elements of the outdoor advertising industry and as a result, terms are often too short and they are apt to over collateralize the debt. (They do not understand the value of billboards.) Also, their legal lending limits may constrain your opportunity to finance larger projects quickly, and they often are limited geographically.
- National lenders – This group may or may not understand your business and often these players are not interested in smaller transactions in industries they do not know. Many operators are too large for local banks but too small for the national lenders.
- Niche lenders – This group understands your industry and can serve well to bridge the gap between the local bank and the large national lenders. They have invested the time to understand the business needs and to be able to provide financial solutions to outdoor operators. This expertise does come with a price however; so don’t expect to get this type of added benefit without a premium. (That premium may come in the form of a fee, higher interest rate or shared ownership with the lender as will be the case with venture capital firms.)
- Private equity – This includes individuals who typically know the operator personally and are willing to provide funding (equity investment or loan) to support their friend or relative with a project. Many people are not comfortable mixing business with friends and/or family, but this is not uncommon. It may include seller financing too.
The following insights are designed to help with a quick approval merchant cash advance in order to help outdoor operators best prepare themselves to handle the task of finding optimal financing. Be aware of the following and adjust your expectations accordingly:
- The loan process takes time and turnaround time will vary. This is because:
- You have to find someone willing and able to do your loan.
- You have to take the time to gather complete information about your company for loan committees and other decision makers.
- Loan committees and credit analysts need time to process the information, ask questions, etc. (And your loan is probably not the only request they are reviewing.) Many banks will need additional time to understand the industry if they are not familiar with outdoor advertising.
- Even after approval, the lender’s documentation and loan closing process takes time. There are collateral lien searches to be done, state and county UCC filings to be handled, lease agreements to be reviewed, etc. (Note that it typically takes three to seven days for UCCs to be processed depending on the state and county involved.)
- Geography/Location can impact your options. Often operators have an established relationship with their local bank. However, when they propose a project to the bank outside their local market, the operators are surprised that their bank is not interested. Many lenders like to lend in their own areas for a variety of reasons. Typically the reason for this is as simple as they like to be able to see and touch their collateral and to be able to meet their clients face to face. Obviously, geographic distance impacts this.
- Not all lenders understand the outdoor advertising business. Don’t assume that what makes sense to you will make sense to a lender whose expertise is spread thin over multiple industries. Most commonly, lenders not experienced with the outdoor advertising industry will dramatically underestimate the value of your plant as collateral affecting how much money they will be willing to advance.
- Loan size matters. In rural areas, local banks often do not have the lending capacity to handle large loan requests. On the other hand, large national media lenders that understand the industry and are competitive on rate typically are not interested in loans under $5,000,000.
- There is not one loan structure that will fit all needs. Commonly, borrowers think of a loan’s interest rate as the key consideration behind which lender to choose. However, there are other very important issues to consider:
- Collateral – Is the lender able to recognize that billboard structures are worth more than the cost of the steel? Is a first or second mortgage required on your home? If additional collateral such as a second mortgage is required, how will you secure future funding needs?
- Term – A longer loan term can significantly improve cash flow, and this can often be more valuable to a growing operator over the long-term. Stronger cash flow frees up funds for future investment.
- Amortization or payment schedule – Related to the term question is the repayment schedule. Typically loans are repaid via even monthly installments in arrears. However, some lenders require payments in advance. If so, is this acceptable to your situation? Is there a balloon payment? If so, can it be repaid? Would you benefit from an interest only structure for the first 12 months or some other variation of step payment? Is your lender able to be flexible enough to offer these options?
- Down payment requirement – What percentage of the project is the lender willing to finance? It is common for lenders to ask for 10% or more capital investment by the borrower. Understandably, this demonstrates to the lender that a borrower is truly committed to a project’s success. However, this required capital infusion could hinder a borrower’s ability to handle other business expenses or impede future investment. There are lenders who will loan 100% or more of the project.
- Prepayment – Most loans have prepayment penalties or yield maintenance clauses included. Many borrowers fail to understand that if a lender agrees to commit their funds to a project over a period of time, they need some level of assurance that those funds will earn the money that the lender will have budgeted for. Clearly it is in the borrower’s best interest to have no or little prepayment penalty, but this is often not feasible. The key question for the borrower here becomes what are the odds that the note will be paid down ahead of schedule. If the structures being financed might be sold early, perhaps the longest-term offer with the best rate is not the best deal if prepayment penalties are severe.
- Fees – Sometimes lenders can offer a competitive rate with acceptable conditions and terms, but with extra fees. It is common for lenders to recoup their own closing and documentation costs via fees, but others charge fees simply for revenue generation that can be overlooked by unwary borrowers.
- Personal guaranties – Lenders will usually ask that smaller operators personally guarantee the debt. They like to know that borrowers are fully committed to the success of the operation and that the borrower shares in the risk that the money might not be repaid if the business fails for whatever reason. Well-established businesses may have the strength to stand on their own and different lenders will have different requirements with respect to requiring guaranties. Does the bank with the lowest rate require a personal guaranty? How much is it worth to you to avoid placing personal assets at risk?
- Ownership – Conventional lenders will not require partial ownership in your company in exchange for financing, but some specialty lenders and venture capital firms will. This may be an alternative if conventional financing is not available at reasonable costs and terms, but one must consider the costs associated with giving up ownership in your company. Clearly this limits the upside potential.
Financing can be tricky and there are a lot of variables involved. Many people see the variables and choices as simply adding to the confusion and they let it intimidate them. Others see this as abundance. Within the varied financial landscape is an opportunity to structure capital to work most efficiently to maximize the wealth inherent in their project. With an organized approach and adequate time allowance, financing can be a tremendous tool to be used to create wealth for yourself and your family.
Keep in mind, the lower a lender’s perceived risk, the lower the loan cost should be. For example, if your lender is requiring down payment, consider how competitive the rest of that lender’s loan offering is – rate, term, fees, prepayment, etc. Realize that providing complete detailed information for the lender will only increase their comfort level with your company, which should result in a more competitive and favorable loan offer to you.
Getting a good plant in order takes diligence and hard work as billboard operators know well. There is value in that. Don’t surrender that value by short-changing or shortcutting the financing aspect of your business.
Article Contributed by:
Mr. Chris Stark
9000 Keystone Crossing Suite 630
Indianapolis, Indiana 46240