We know that the Housing Ice Age of 2007-2012 forced many building-products businesses to climb the debt cost-of-capital ladder. Many were forced out of traditional banks to higher-cost, non-bank loan sources: non-bank asset based lenders (ABLs), commercial finance companies, AR factorers, and even hedge funds (think 84 Lumber borrowing from Cerberus Capital). These moves resulted in increases in the interest rates and fees incurred by borrowers, even two-or three-fold, despite a record-low interest rate environment. Businesses that remained traditional bank clients saw their loans become more costly and punitive. Fees increased, reporting and audit requirements increased, advance rates against collateral decreased, covenants tightened, and loan terms shortened. All of these moves increased the overall cost and risk of debt capital.
But as this new chapter in the market and your business’ life begins, collateral and cash flow are improving. Your business is becoming less uncertain and more profitable. With this improvement in your financial performance, your loan options are expanding and those options are becoming less costly and punitive.
- Understanding the most important terms of loan agreements—primarily interest rate, fees, covenants, advance rates, and expiration date, and how they affect you.
- Understanding the “market” for these loan terms (i.e. what terms are obtainable for a business of your type, size, geography, and financial performance).
- Understanding your options in moving to other lenders by "testing the market."
- Using that information to open discussions with your existing lender to renegotiate your current loan terms in line with market.
- Moving your business to a new lender if you cannot obtain satisfactory terms from your existing lender.
This process is important for businesses with existing debt as well as businesses that expect to require revolver financing to grow going forward. Optimizing loan terms on debt you have or will need to grow will improve your business' financial returns (via lower interest rates and fees, etc.) and lower your business' risk (via maximum flexibility in your loan covenants, restrictions, and other loan terms).
So many business' overall debt cost of capital climbed the ladder on the housing market’s way down. Once your collateral and cash flow show noticeable improvement, it’s prudent to begin the process to descend back down the cost of capital ladder in anticipation of the market’s ride up.
Matt Ogden is managing principal of Building Industry Partners LLC, a building products-focused private equity investment and M&A/debt advisory firm that is a co-founding equity sponsor of US LBM Holdings. You can reach him at firstname.lastname@example.org and 214.550.0405.