Many people assume that banks
stop lending in a less favorable
economic environment, but this oversimplifies a complex issue. Banks
with moderate risk portfolios continue
to provide businesses with access to
credit and, in doing so, can promote economic growth in turbulent times. While
it is true that there is an increased level
of scrutiny during the loan approval
process and that the pricing and structure of loans is more disciplined, many
companies can still obtain the credit
they need to grow.
Smart Business spoke with Michael
Harrington of PNC’s risk management
group to gain some insight into what
banks may be looking for during the
credit decisioning process and how middle-market companies can better position themselves to seek credit.
What is different about the credit decisioning process in tough economic times?
For most banks serving the middle
market, the fundamentals of lending do
not vary significantly with economic
fluctuations. They look at a variety of
traditional criteria like cash flow, liquidity, leverage, collateral and the unique
challenges that customers face within
their industries. Another critical factor
in an analysis is the experience and
integrity of a company’s management
team. Companies that are well managed
tend to make strategic and tactical decisions for long-term success. The bottom
line is that credit is still available for
middle-market companies that have historically performed well.
Are there certain industries for which it is
difficult to obtain credit in an uncertain
economy?
Although there are strong performers
in every industry, banks may be more
cautious about lending to companies in
industries exposed to the housing sector, financial services and anything
impacted by consumer discretionary
spending, such as the automotive and
retail industries. It is still possible for
companies in these industries to obtain
credit, but the due diligence process will
likely be more judicious. Banks will be
particularly cautious with any company
carrying excessive amounts of leverage.
In general, businesses should adjust
their expectations about loan pricing
and structure in an uncertain economic
environment as loan terms will likely be
tighter with higher all-in borrowing
costs. Historically, tight credit markets
have eventually improved and companies can then return to a more favorable
lending environment.
What are some of the ways middle-market
companies can prepare if they are planning
to seek credit?
- Keep the lines of communication
open: Be open and honest with your
bank so that it has an accurate understanding of your company’s financial performance. Share your industry
expertise to give your bank the kind of
in-depth understanding that will compel
it to help you navigate uncertain times
proactively rather than forcing it to react
to an unexpected event. - Leverage the expertise of your
bank: Middle-market companies often
do not leverage the deep industry, financial and risk management expertise that
a bank can provide. Think about your
banker as an adviser rather than a commodity provider and don’t hesitate to
share all facets of your business. - Surround yourself with advisers
who will help you achieve your
objectives: Choose your advisers —
banker, lawyer, accountant or board
member — based on their proven experience in the market. Professionals with
a reputation for bringing clients new
ideas and challenging conventional
thinking will be an asset, particularly
during an economic downturn.
This article was prepared for general
information purposes only and is not
intended as legal, tax, accounting or
financial advice, or recommendations
to buy or sell currencies or to engage in
any specific transactions, and does not
purport to be comprehensive. Under no
circumstances should any information
contained herein be used or considered
as an offer or a solicitation of an offer
to participate in any particular transaction or strategy. Any reliance upon
this information is solely and exclusively at your own risk. Please consult
your own counsel, accountant or other
adviser regarding your specific situation. Any views expressed herein are
subject to change without notice due to
market conditions and other factors.
©2008 The PNC Financial Services
Group Inc. All rights reserved.
MICHAEL HARRINGTON is an executive vice president in PNC’s risk management group, part of The PNC Financial Services Group
Inc. Reach him at (412) 762-2019 or [email protected]. To learn more about obtaining financing for your business, check
out PNC’s Advisory Series at pnc.com/joinus.
