One: Look For Debt When You Don’t Need It.
Start talking to lenders before you need them. It will allow you to understand their lending and reporting parameters and allow you so start fashioning your company to meet those parameters. One of the most impressive managers Insider has encountered in 20 years of lending introduced himself to Insider on the phone and had an in-depth conversation about what Insider looks for when making a loan. One year later, he called Insider and said “okay, my company meets all your lending requirements, I’d like to borrow some money.” That’s how to impress a lender.
Two: Cultivate Multiple Lenders.
Just because you have a good lender doesn’t mean you should stop taking lender meetings. Financial institutions change. It’s good to have 1-2 alternatives if your existing lender gets cold feet. Insider out of home lending business has relied on bank financing for over 20 years. Three times Insider has had a banks ask to be paid off. In one case the bank ceased lending to finance companies. In two cases the banks got into real estate lending difficulties and needed to raise liquidity by calling in loans as fast as possible. Insider replaced these banks because he had good lending relationships with other financial institutions.
Three: Know Your Lender.
There are four things to ask your lender. (1) Do individuals have lending authority or does a committee. Ask whether your lender uses a signature system (a loan application is routed to individuals for approval) or a committee system (the bank’s loan committee decides). If you know the answer to this you’ll know how long it will take to get your loan approved. (2) What are your credit limits. Lenders limit the maximum amount of credit they will extend to a borrower in order to keep a diversified loan portfolio. Ask what the credit limit is at your lender. You need to know how big you can grow before exhausting your lender’s credit limit. Don’t wait until you are trying to close an acquisition to be told that you are too big for your bank. (3) Do you have any loans to out of home companies or media companies? It will be easier to be approved if your lender already has loans to the out of home advertising industry. You can also feel more comfortable about your lender’s loyalty to you in a recession if they understand out of home. (4) Can you give me references. Ask to talk to borrowers. Find out what the lender is like to deal with, especially during a recession.
Four: Don’t Borrow Too Much.
Debt capacity for an out of home company should not exceed 5.0 times trailing twelve months cashflow or 3 times trailing 12 months revenue.
Debt capacity is based on trailing 12 months. Debt capacity needs to be based on history. That way you can be sure that the performance of your company as it is now is enough to pay your future debt. Take the extreme case. If you borrow existing trailing 12 months cashflow to build a new sign and the new sign is a complete flop and fails to generate any cashflow you will still be able to pay your debt. You never want to be in a position where the new money you borrower has to generate a minimum return to avoid a default.
Debt capacity is based on EBIDTA. EBIDTA means earnings before interest, depreciation, amortization and income taxes. This is the relevant metric when computing debt capacity because it represents what cash is in the business to service debt. EBIDTA excludes non-cash expenses like depreciation or equipment and amortization of intangibles.
The proper limit is 5 times EBIDTA or 3 times revenue.