Featured Article – 2010 July

Securing Credit in a Tight Market

Helpful Hints

Here are some suggestions on how to better position your business when looking to have a request for financing approved.

  • Put together a complete package: Have a business reason for financing; have three years of financial records — tax returns, audits, financial statements. Prepare business plan projections and aging statements on accounts receivable and payable.
  • Have reasonable expectations: Allow appropriate time for the request to be considered, underwritten and approved; be prepared for requests for additional information
  • “Cash is king”: Ability to repay will weigh more heavily than collateral in the decision process.
  • Demonstrate that you’re a good manager: Show the steps you’ve taken to reduce or control costs, for example, reducing overtime, renegotiating insurance contracts, and/or limiting discretionary expenses.
  • Keep lines of communication open: Communicate regularly with your banker; let him know how your business is doing; bankers don’t like surprises.

Securing Credit in a Tight Market

by Christopher Todd

Even as fresh signs of an economic rebound continue to appear, owners of struggling businesses (and “struggling” is an adjective that can apply to almost every business these days) fear that tightened access to credit will leave them poorly positioned to profit in the recovery.

As business continues to pick up, companies need more resources. Sales increase, so they need to purchase more materials, and payroll costs will go up as they fill those orders. But borrowers who have maxed out their lines of credit can’t just call their banker, say “business is finally picking up, so I’d like to increase that credit line,” and expect a routine approval.

With federal regulators giving increasing scrutiny to banks that have underperforming loan portfolios, lending officers at all banks are not only defending their existing portfolios but also looking more carefully at requests from prospective borrowers, even those whose accounts they’ve served for years.

While businesses may feel that the rules of the lending game have changed, bankers are more likely to say the rules are the same but they’re being enforced more strictly. No matter what the opinion, the reality is the same: when it comes to financing, businesses can’t take anything for granted anymore.

Loans are still available, but borrowers must work harder to receive them.

Banks are willing to loan to sound, secure borrowers who have sterling credit ratings and leave little doubt that they’re capable of repaying their loans. Thanks to the broad economic downturn, however, the number of businesses who fit that description is significantly smaller than it was two or three years ago.

“Part of this is a natural cycle,” says Jayne Armstrong, Delaware district director of the U.S. Small Business Administration. “Banks may have cut credit lines. Sales are down. If you don’t have the sales to justify a loan, you’re not going to qualify. That’s the harsh reality.”

How, then, does a borrower strengthen his chances of securing additional credit?

It starts with additional documentation. Be prepared to show your bank three years of financial records — tax returns, audits, financial statements. Prepare business plan projections and aging statements on accounts receivable and payable. Depending on the size of your business, the bank may want to see personal financial statements as well as the documentation for your company.

As always, “cash is king,” so make sure you can demonstrate you have the resources and cash flow to pay back what you borrow.

Collateral is also important. It’s not that the bank will be eager to foreclose on your vacant lot or a warehouse if you stop making payments, but putting up hard assets as collateral will give the bank a greater sense of security.

If your current line of credit is asset-based, take a close look at your inventory. Say you’ve got a large inventory of lumber, whose value has been increasing in the last few months. If your inventory turns out to be worth significantly more than what you paid for it, let your bank know. That may provide some of the justification needed to increase your credit line.

Your bank will also want to know what you’ve been doing to tighten your belt. Make sure the bank knows what you’ve done to reduce overtime, to renegotiate terms on health insurance and other benefit contracts, and to cut expenses in non-core areas of operations.

Take a look at how you’re working with your unsecured creditors, a topic discussed in more detail in our December 2009 newsletter. You have more leverage than you might think. It’s to your advantage to defer or restructure payments, so explore the possibility.

Even after you’ve taken these steps, it’s possible that the bank won’t increase your credit line, or it will set a higher interest rate. In today’s environment, that means it’s time to shop around. The fact that you’ve been dealing with the same bank for many years doesn’t matter now as much as it once did. While it’s possible the bank doesn’t consider you as low a risk as it did two or three years ago, it’s also possible the bank has issues of its own; for example, its loan portfolio might now have more exposure than it desires in your industry.

The bottom line is this: Be realistic about your expectations for credit. The credit market is nothing like it was three years ago and there’s no reason to think those days are coming back.