How to Talk to Bankers

I spend a lot of time assisting clients in finding financing and in doing do I’ve learned a lot about what bankers are looking for from any prospective borrower. Here are some of the key takeaways I’ve learned over the years from talking to bankers:

Be Ready with a Worst Case Scenario. Borrowers invariably create a rosy best-look business plan to demonstrate how well they will perform with the borrowed money. But bankers have learned from hard experience that things often don’t go as well as planned. While bankers certainly want to see the optimistic business projection they are more interested in your worst case scenario, so a smart borrowers will prepare a worst case scenario along with the best case one.

The bankers wants to hear about everything that might go wrong with your plan – project delays, slow sales, higher than expected cost of construction – and then to understand how the borrower plans to cope with each potential snag. They want to be shown that the borrower will be able to repay the loan even if things go wrong. A banker is going to be far more impressed to see ta plan that considers the challenges and has a solution for every contingency. I’ve seen bank loan applications fail when the borrower was unable to answer simple questions about how their plan might fail.

Don’t Talk in Acronyms. Telecom borrowers are invariably highly technical people who understand the nuances of building and operating complex networks. The banker can understand this by looking at your credentials, experience and references. Most bankers don’t want to hear about the detailed nuts and bolts about how the technology works, and they are going to care a lot more about the products to be sold on the network and the plan to effectuate those sales.

I’ve sat on meetings and calls between borrowers and bankers where the response to a simple technical question elicits a fifteen minute spiel on the nuances of the technology. Bankers are not impressed with this, and in fact it can be worrisome if it they perceive the borrower as somebody who can’t explain their business in plain English – because the banker will know that’s what customers are going to want to hear. My advice is to tone down the technology unless the banker specifically wants to hear the details.

Understand the Market. I’ve had numerous clients over the years who have had the philosophy of “build it and they will come,” meaning that they were so positive of the superiority of their proposed network that they just assumed that people will buy their products. The vast majority of the business failures I’ve seen over the years were due to this blindness of the market.

Bankers are going to want to see evidence that people are ready to buy from the new network. In larger markets that might mean a statistically valid survey. In smaller ventures that is going to mean pre-sales and having a list of customers who are ready to buy service. Bankers also want to see a comparison of proposed prices and the prices of the competition  – I am often surprised by proposed new ventures that haven’t taken the time to look at actual customer bills in their proposed market. Do the homework and make the effort to understand the market before asking for funding.

Understand What Bankers are Looking For. Every lender is different and early in the process you need to ask them how they will judge your loan application. I recommend a two-stage process for getting a loan. The first meeting should be to understand what the bank is looking for. Have the banker describe the borrowing process and then use a second meeting to make a formal presentation of the business plan in a way that meets their requirements.

If the bank is interested primarily in collateral, then walk into the presentation ready to talk about that. If they are more focused in seeing a business plan that meets some set of financial metrics like debt service coverage ratio, then walk into the presentation ready to answer those questions.

Bankers talk in lingo just like our industry, and it’s vital to make sure that you understand what they want from you. I’ve seen many borrowers who don’t understand a bank’s requirements and who then never answer the basic questions the bank asks of them. It’s not uncommon for a borrower to be intimidated by the banking process and to be afraid to show that they don’t understand the banking lingo. In the end, if you don’t understand what your banker wants, then it’s likely you won’t be making the right proposal and the chance of getting a loan are greatly diminished.

Banking Challenges for Fiber Builders

I’ve often mentioned in this blog that it’s gotten harder to finance fiber infrastructure. Today I want to discuss a few of the specific issues that fiber builders face when trying to find bank financing. There are two traditional sources of funding for the industry – the Rural Utility Service (RUS) and CoBank.  However, many fiber builders don’t qualify for this funding since both institutions favor established mature companies. Any company that doesn’t fit the profile of these two lenders must turn to the only other source of funding – local and regional banks. Following are some of the issues I see when trying to borrow from banks.

Familiarity with the Industry. Local banks often are leery about lending to telecom companies because they are not familiar with the business and they fear lending into an unknown industry. Local banks are much more comfortable lending to businesses they understand and make loans to car dealers, retail stores and the other kinds of local businesses that have been their long-term core borrowers.

Amount of Borrowing. Every bank has some pre-determined maximum amount they are willing to lend to any one borrower and it’s easy for a fiber overbuilder to quickly hit this limit. I’ve rarely met a fiber overbuilder who doesn’t see endless opportunities for expansion and it’s not hard to hit a bank’s maximum lending limit.

Loan Terms. Local banks are often uncomfortable with the longer-term loans needed to finance fiber.  Banks prefer to make loans for relatively short periods of time, with their preference being short loans of 2 – 5 years. Fiber builders are often forced to only chase projects that fit the short loan terms – which means cherry picking only the best opportunities. In doing so they will be passing up opportunities that would thrive and produce good returns with a longer loan terms of 5 – 15 years.

Collateral. Banks are often uncomfortable with a fiber network as collateral. It’s not hard to blame them for this. A fiber network, once in the ground or on the pole does not automatically have a liquidation valley equal to the cost of the construction. The real value of a fiber network is the revenues from customers who are added to the network – and banks have a hard time accepting this concept. A little research will show bankers that failed fiber ventures have often liquidated the physical fiber network for pennies on the dollar, and that rightfully frightens them.

Quantifying Risk. It can be difficult for a bank to understand the downside risks of building a fiber project. One of the key steps to making a loan is to understand the likelihood of the borrower not meeting the proposed business plan, and bankers have a hard time quantifying and getting comfortable with the potential downsides of the proposed business.

Meeting Metrics. Many banks are driven by metrics – meaning that they look for key financial performance metrics from a borrower. It’s hard to meet the typical metrics for a new fiber network. When a network is first built it boosts the balance sheet – but revenues then lag a few years behind until the new network has enough customers to meet expected metrics. This cycle of early losses followed by eventual gains does not fit easily into the expectations of a metric-driven bank.

Unfortunately, any one of these issues can convince a bank that the fiber loan is too risky or doesn’t fit their comfort zone. Many banks are comfortable with infrastructure loans, but there are infrastructure loans that better meet their expectations. Consider a loan to build an apartment complex. There is the same period of zero revenues while the buildings are constructed, but the expectation is that the borrower will then quickly reach full revenues within a relatively short period after the end of construction. An apartment building also provides comfortable collateral because there is an established market for selling repossessed buildings. Bankers in general understand the apartment complex operating model and are comfortable with the variables of operating an apartment building.

Fiber overbuilders need to be prepared to tell a story that can get a banker comfortable with each one of these concerns. I always advise fiber builders that they must put themselves into the banker’s shoes and look at their own business plan as a skeptic. I’ve often seen fiber builders who point to a business plan that eventually makes a lot of money and who can’t understand why a banker doesn’t see their plan the same way they do. Many of the misgivings that a banker might have about funding a fiber project are legitimate and the borrower must convince the banker that the overall level of risk is small – a tall task.