Get Working Capital at Competitive Rates - Accounts Receivable Financing at The Receivables Exchange

As a commercial lending and banking and finance executive for nearly two decades and now as a CFO of a $35 million customer-owned electric cooperative providing electric distribution services in Ohio, Ed Beemiller has had the unique experience of sitting on both sides of the table. In addition, he has served as a finance consultant for several years, helping middle market companies identify and secure the best loan options and overall capital structure for their businesses. Below are some excerpts from a recent conversation with him on the economy, the credit crunch and what today's CFOs and business owners can do to weather the storm.

TRE: What are you seeing and hearing out there about today's credit crunch and what is different for you this time around?

Beemiller: Although I have experienced the ebbs and flows of seventeen years of credit market fluctuations, when I consider what is going on in today's markets, I can confidently say I have never seen anything like this. We've all lived through downturns and tightening credit markets before. This time is different. Clearly, three to five years ago the economy was much more robust and many middle-market companies enjoyed an advantageous negotiating position with their lending relationships. Many businesses in the larger cities and surrounding metropolitan areas experienced the good fortune of having several banks knocking down their doors to get their business. This competition lead to many financial institutions stepping outside of their own internal credit guidelines, and structuring thinly priced loans and loosely structured credit facilities. During this time period, many financial institutions were stepping 'Outside of the Box' and as market experience has shown in the past, it's only natural that there would come a time when these practices would start catching up to these institutions. Small businesses and middle market companies' access to capital has shrunk exponentially in this marketplace, and in addition, companies are unable to obtain similarly priced and structured credit facilities, as they could just a couple of years ago.

TRE: What's changed?

Beemiller: Now, most lenders are operating 'Back in the Box' — They are reading from their commercial lending bibles again and overall access to capital has tightened. Banks are underwriting credit requests in a far more conservative manner, and staying within their lending standards in regards to deal structuring, including tighter cash flow and leverage ratios. This change in underwriting practices and overall deal structuring is causing tremendous pressure on commercial borrowers during this current market downturn. And, while I don't disagree that it's the right thing to do from the perspective of the banks, it is no doubt having significant impact on business spending and business growth overall, in return creating a ripple effect, the impact of which will take time to fully measure and understand.

TRE: What does this mean for CFOs and business owners?

Beemiller: That's a good question and because of my unique experience on both sides of the lending equation, I am often asked by my CFO colleagues if I have any advice that I could share to help them better protect, or grow, their companies, in today's difficult credit environment. There are three things I tell them.

1. Don't go dark - It often seems to be a natural reaction in tough economic times for companies to crawl into their hole and hide from their lending partners, avoiding their calls at all costs, postponing their meetings. Don't. As a former banker, I can tell you how critical it is that you communicate, communicate, and communicate some more. It is precisely in these tough times that you should be providing even more information and sharing the details of what you're doing to overcome any troubling economic or performance factors within your company. In this case, no news does not mean good news. The less you communicate the more they assume that you have something to hide.
2. Be selective when it comes to choosing your loan officer - This is probably where most business owners or less experienced finance executives fall short. This is not just about a friendly face, but more importantly, this is about the one that garners a high level of respect within the organization. Find that person, teach them your business, and nurture the relationship as if the success of your business depended on it. Because one of these days, it will.
3. Identify alternative sources of capital - The most experienced CFO's know that you never want to be beholden to just one source of capital. It is critical to the success of your company to nurture relationships with other capital providers, just in case there is a sudden change.

As the CFO of your company, it is your job to secure the most viable sources of capital - which means that it is up to you to find the least expensive capital with the best terms for your company. You might have budgeted to spend $1 million on equipment this year only to find mid-way through the year that you have the need for $1.5 million. However, you need it now and you don't have the time to wait to go through the often seemingly arduous process of fighting the battle to increase your loan limit or seek out a new relationship. This is when being proactive pays off.

TRE: How has the credit crunch affected a company like Midwest Electric? What will Midwest be doing differently over the next 12 - 18 months?

Beemiller: We have a great business model, with many years of consistently strong profits and the good fortune to be able to capitalize on our strong reputation by having a pipeline of some major new projects in the energy service business that could almost double our revenue in the short term. And even better, this "new" business is really our core business. It is one that we know quite well, serving very large utilities that are extremely safe and sound credits. However, I realize in today's uncertain environment that even with our strong business fundamentals and track record, our banking partner may not be able to accommodate this growth as they might have done just a short while ago. So as a prudent CFO and someone who likes to practice what he preaches, I have been actively working to identify and line up alternative funding sources. And really, this is just good common sense and in keeping with the CFO's fiduciary responsibility to make sure that funding and all other key business risks are mitigated to the extent possible. So in this same spirit, I have made sure that my efforts to diversify my funding sources have been done with the full cooperation of our bank. Because I know they would like to do everything they can to maintain us a good customer but unfortunately may not be able to fully deliver on this desire, having nothing to do with my business and owing only to the challenges posed by the current market environment. That's why I was attracted to The Receivables Exchange.

TRE: What are your thoughts on The Receivables Exchange and how it might be able to positively impact small to mid-market companies?

Beemiller: I think The Receivables Exchange is a great new funding source and because of its flexibility will be attractive to a variety of businesses. What particularly attracted me to the Exchange is how it is not an "either / or" solution and can be used to complement one's existing financing relationships. As I mentioned, we have a great relationship with our existing bank however through reasons related solely to the challenges involving the current credit markets, they may not be able to accommodate all of our growth in the near term. So we've discussed alternatives like the Exchange and they are very supportive and willing to permit us to fund pieces of our business with some of these other sources because it keeps our existing business in place and continues to keep us as a happy customer. This is just smart business all the way around.