A recent study by a well-respected insurance investment bankingfirm reported that merger and acquisition activity was off some 40percent in 2009. Among the reasons cited beyond economicuncertainty and fear of national healthcare were jittery banks andlack of access to capital.

It's no surprise that banks have all but stopped lending unlessthe borrower is of such low risk that even a bank examiner wouldhave recommended the loan. The credit crunch is far from over and ahard market for leveraged lending will persist for the foreseeablefuture. Loans to agencies always have fallen under the broaddefinition of “leveraged finance”–cash-flow based loans that arenot supported by hard asset values or balance sheet equity andreflect intangible factors such as “enterprise value.”

Bankers run from these types of loans in times of tight credit.Worse, if the bank is under any pressure from problem loans, itwill look to exit these relationships lest they be criticized byregulators, even if the business never missed a payment. Unlessyour bank specializes in these loans, you may have a difficult timemaintaining credit.

Borrowers often are their own worst enemy, giving banks theopportunity to call a loan by breaking, or not adhering to, loancovenants. These are the promises in loan documents borrowers maketo banks. They can take the form of affirmative covenants, in whicha borrower agrees to keep promises such as producing sufficientcash flow to repay the debt, with an adequate cushion,
and supplying financial information. Documents also containnegative covenants–promises that a borrower agrees it will notbreak, such as changing the composition of owners, payingdividends, taking distributions and incurring additional debt. Abusiness can trigger a loan default by breaking a promise fromeither category.

Right now, many agency accountants are compiling or reviewingannual financial statements. These will be delivered to bankers whowill scour the contents. Before delivery, agency owners shouldcarefully interpret the financial results and the potential impacton the loan.

Review the financial statement with regard to the loancovenants. If there is a debt service covenant, calculate it tomeasure compliance. Share the calculation with the banker in acover letter with the financial statement. State that you reviewedthe loan requirements and determined that it is in compliance. Signboth the letter and the financial statement–something that often isoverlooked, particularly in the age of e-mail and faxes. The extrastep of attending to the certification of compliance in a letterdemonstrates a degree of financial responsibility and knowledge ofthe business. Your banker will appreciate this.

Pay particular attention to some of the occurrences that maymake financial statements appear weak. Has an owner made awithdrawal or dividend that caused a debt service covenantviolation? Present a plan to the banker to repay this draw promptlyand reinvest the funds as capital or a subordinated loan. Areaccounts receivable extended? Have company payables beenreconciled? Are you properly recognizing direct-billed commissionreceivables? Is the agency in trust? If your accountant recommendedthat the business strip cash out of the business at year end, youmay want to consider finding a new accountant.

If there is a weakness in the financial statement or anon-compliance with the terms and covenants of the loan, inform thebank immediately, and with a plan to cure the deficiencies. Don'tcompound the problem by surprising your banker.

Agency principals must realize the importance of maintainingtheir financial standing and credit availability with their lendersto take full advantage of opportunities for growth.