Improving options to get a loan

When private companies are looking to expand their business, often a key component of their strategy is to acquire credit. However, for some companies in Alberta, this isn’t so easy.

“I think what you’re going to find is banks are leery of certain industries,” says Robert White, a Calgary-based partner in the Consulting Services practice of PricewaterhouseCoopers LLP. “They will be anxious in the energy services space, particularly conventional, natural gas-oriented firms.”

While the price of oil has steadily increased over the past two years due to stronger demand, natural gas prices have moved in the opposite direction as inventories and production have continued to rise.

As natural gas prices have fallen, so too have sales at natural gas producers and energy services companies.

For smaller scale service operators without leading-edge technology advantages, “revenue didn’t drop just 10% or 15%; it often declined by 50% or more,” says Stephen Kent, a managing director with PricewaterhouseCoopers Corporate Finance Inc. (PwCCF) in Edmonton. “That affects the ability to borrow money. Nevertheless, we have seen energy service providers that offer productivity boosting advanced technologies fair much better.”

Lenders usually measure the performance of borrowers over a 12-month period, which makes getting credit more problematic.

Borrowing from some banks may also be difficult because of challenges in their own lending portfolios. They simply won’t lend because they might be too heavily weighted in one sector or industry and want to be more diversified.

If banks aren’t willing to lend, there are alternative lenders. Generally, they are more interested in providing loans to larger private companies. Angel investors, private equity funds and hedge funds are among some of the options available.

“Typically those courses of capital are more expensive than traditional banks,” explains Brooke Valentine, an associate partner with PwCCF in Calgary. “But in exchange for that higher interest rate, that lender is willing to live with a higher degree of risk on the loan.”

Not only is credit harder to find, borrowing costs have increased despite a cut in interest rates by the Bank of Canada. Most credit offered is prime-based lending, which is the prime rate plus a certain percentage point, and the latter portion has risen more than rates have come down.

“Another challenge for companies is getting credit on terms that are consistent with the needs of their business,” White says. “They might get credit but either the costs are so high or the terms are so restrictive that it’s not quite as favourable as they might like.”

The loan might not help companies get them to where they want to be. And without as much of a competitive marketplace for securing the debt, they might be forced to take whatever the banks are offering.

“When you borrow money, the devil is in the details,” says Kent. “Unless you understand what you’re doing, you’re probably signing something you shouldn’t. This is where having an experienced advisor to guide you through the process can offer significant benefits."

To gain better access to capital, private companies can create a 12-month financial forecast, similar to what public companies do. Lenders appreciate this because it helps them understand the business in order to set parameters around the loan package they’re providing.

“Private companies, because of their size, tend to be more nimble than a larger public company,” Valentine says. “It’s easier to make a change that might be necessary in order to secure the debt it’s after.”