|Recent developments in the petroleum retail industry and in the securitized lending market have necessitated the need for stricter underwriting for acquisition financing and refinances. Capital was abundant in the late nineties, but due to a string of high profile convenience store chain bankruptcies, environmental claims, high default rates among franchise convenience store loans and the collapse of securitized lending within the petroleum retail industry, lenders are exercising much more due diligence than ever before. Most banks and lenders avoid the market totally. It is important today, now more than ever, to deal with a company that understands the intricacies of the industry and its cyclical nature. Operators, dealers and jobbers face unique financing issues and as such, qualified individuals and companies should be consulted and retained.
Capital is still definitely available to petroleum marketers. Newly introduced short term/bridge financing programs have re-introduced aggressive underwriting to the marketplace.
The criteria that lenders look at to evaluate a potential commercial loan have remained the same. The five C’s of credit are:
Character: What is the credit history? Does the borrower have a history of paying their debt?
Capacity: Does the borrower have the experience to operate the business? Capital: Does the borrower have the financial capital necessary for successful operations?
Conditions: Does the business currently face favorable or unfavorable conditions in the operating environment?
Collateral: Does the borrower have assets available to secure the loan?
These five factors are the basis for underwriting all loans. Cash flow is still the predominant benchmark for underwriting (1.25 to 1.0 generally is the minimal accepted debt service coverage on an SBA basis, 1.35 to 1.0 is usually the minimum for conventional loans ). While interest rates have fallen dramatically in the past few years, the end rate to the C-store borrower has not fallen as dramatically, as spreads have risen. Regardless if the indexes used for underwriting is the prime rate, the treasuries or Bond rates, attractive rates are available. This is a good time for well-capitalized operators. Capital for acquisitions and re-financing is readily available for prudent deals. The number of qualified competitors for transactions has declined significantly. A borrower who has demonstrated a long successful track record is much more likely to get a loan approved than someone relatively new to the industry.
But what type of financing is right for YOU? Many times a local bank will provide the best terms for a borrower because they may already have a deposit relationship or merchant account with the borrower, so they can offer a more attractive rate. However, most of the smaller banks do not like to lend to this asset class, plus the lack of understanding of the industry in general tend to make this not an option. This leaves the borrower a few options; SBA or government backed financing, conventional financing, bridge or hard money, specialty finance or self funding from cash flow, all offering distinct advantages and disadvantages.