The state of today's economy has caused many financial institutions to significantly tighten lending policies. For many industries this situation has caused folks to go into "panic mode" in order to continue to do business while having access to less operating capital. Although many financial institutions remain interested (for the moment) to loan money to the alarm and security industry, there are a number of us playing this game who may not fully comprehend the consequences associated with life in the finance fast lane.
While some of the rules have changed, there are several which have not changed at all. Those of you who have played the game for a long time are well aware of "material adverse change clauses" in the covenants on your loan documents. Unfortunately, a lot of people playing today are not aware of some of the new and creative things certain lenders have incorporated into the covenants so as to cover their butt's in a shaky economy.
Ever since the dawn of lending, financial institutions have found it necessary to provide themselves with certain protections on business loans regardless of the credit worthiness of their clients. No matter your particular FICO score, material adverse change clauses have become considerably more intense and strict recently. Back in the 1970s and '80s for example, a material adverse change clause previously would state that if your company revenue decreases by a certain percentage in a given amount of time, the bank would give you from 30 to 60 days to rectify the situation. If you didn't rectify the situation, they would have the right to call your note "right then." If you couldn't pay them back, of course, they could and would foreclose on your company.
Today, money lending institutions are under a great amount of pressure to hedge their bet's and have broadened the scope of these protections by intentionally making many of them considerably less specific.
Some examples of the new generation of adverse change clauses can include changes to your company's management team, changes in your operating costs, changes to percentage of net attrition, higher leverage (earnings to debt ratios), and any number of financial changes they deem as a threat (or potential threat) to their ability to remain gainful.
A negative change to a company's debt to EBITDA (earnings before interest tax depreciation and amortization) has already caused a number of lenders to foreclose on some business loans. Another clause threshold commonly found in loan covenants is if the company debt goes beyond the threshold of 10 times the RMR.
Keep in mind that you will have to provide regular and accurate financials to your lender and that they will be looking very closely at them throughout the duration of your relationship. This is yet another significant reason why it is crucial to help your entire team become even better at customer and employee retention, employee ownership of problems, sales strategies and growth tools. The lenders are watching you and what you do. With the current state of our nation's economy, no matter how good you already are today is perhaps the best time to train your team to take full advantage of every growth opportunity you have. Enhancing the value added perception of doing business with your company as opposed to your competitors is perhaps one of the only meaningful ways you can not only differentiate yourself from everyone else, but also secure funding and growth at the same time.
Sadly, too many security dealers still rarely provide anything other than product and technical training for their employees. Those who do train their teams are growing more profitable business in spite of a very weak economy, and are answering far fewer questions from money lenders.
Regardless of whether you bring in outside business training for your team or not, unless you really learn how to play the finance game, you can do some serious damage to your business. It has been my experience that, compared to the mainstream banking institutions, alarm industry "inside" lenders seem to be more reasonable and more willing to work with alarm dealers when some of the adverse change criteria get close to the cut-off line of breaking the rules. Still, you might consider having an experienced attorney fully explain the covenants in your loan documents before you sign anything. As for borrowing money, it's usually best to pay down your debt as quickly and efficiently as you can. The finance game has clearly helped many businesses in our industry in many profound ways. It can however become a double-edged sword unless you take the time to really learn how to play it, and how to protect yourself when things change.
About the author: Bob Harris is managing director for The Attrition Busters. With over 30 years in the alarm industry, he provides seminars, business consulting, and workshops to help great companies become even better. Bob can be reached at (818) 730-4690 or by email at [email protected]. Learn more about The Attrition Busters at www.attritionbusters.com.
