These days, there is a misconception
regarding the credit crunch. If you take
a look at the data published by the
Federal Reserve, commercial and industrial
lending was actually up through November
2008. This means, for traditional operating
businesses, there is plenty of credit available.
The same data shows the real difference in
credit today — lending standards have generally tightened. So, businesses on the margin (high leverage, weak cash flow coverage)
that may have received loans several years
ago may now have trouble getting those
same loans. Further, the data shows that loan
spreads have widened for businesses.
“Even though LIBOR and federal funds are
at historically low levels, a borrower’s all-in
rate, even with a higher spread, is extremely
cheap right now,” says Steve Hendricks, manager, commercial banking, FirstMerit Bank.
Smart Business spoke with Hendricks
about how businesses can plan to operate
successfully with new lending standards.
How can businesses survive if they are
dependent on credit?
Communicate with your bank. This cannot
be emphasized enough. Banks are being
extremely diligent about reviewing their
credit portfolios. A business owner should
meet at least quarterly with his or her bank
and review current financial information,
including the budget/backlog and receivables
aging. The business owner and the bank
should be on top of any trends or changing
industry conditions.
Business owners should also scrutinize the
bank. That means owners should perform
their own due diligence. Business owners
should know the bank’s financial condition
(profitability, loan/deposit ratio, charge-offs
and capital level) and its ability to provide
additional credit in the current market.
Through this turmoil, an extreme divergence
has developed in what certain banks can and
cannot do. It is important that the business
owner understand the bank’s capabilities.
How do you recommend business owners
adjust their business plans to prepare for
tighter lending standards in 2009?
The primary concern of a business owner
should be his or her own operation. The credit is available to the well-managed business. A motto for a business owner should
always be this: Plan for the worst and hope
for the best. That means a business should
have a definite action plan should market or
industry conditions deteriorate. The business should have flexibility to withstand
changing conditions. The most important
measure of this flexibility is the business’s
working capital position and access to liquidity, including a line of credit. An owner
should be examining all assets and business
options in order to maximize liquidity.
What are successful businesses doing today
to stay on top during turbulent times?
Most have communicated with their banks
and negotiated extensions to their lines of
credit to ensure access to liquidity. Too often,
businesses focus on what they paid for the
credit. Smart business owners realize that the
access to credit and ability of the bank to
respond appropriately is vastly more important. The ability to access credit is crucial for
most companies, thus, being a well-run business has never been more important. Most
capital market alternatives are not available
for accessing credit. Bank credit remains the
best source of capital for closely held businesses. A business’s credit needs should contract as its volume contracts. Again, the credit is available and inexpensive right now, but
the business owner should be prepared to
meet higher standards from the bank in order
to gain access.
What qualifications are banks looking for
today when they provide credit?
Today, banks are looking at a business’s
cash flow, liquidity (working capital), net
worth, collateral and industry risk. Certainly,
specific industries are having a tougher time
accessing credit. Industries such as automotive, investment real estate owners/developers and retailers are a few such industries.
That said, a superior management team can
still produce outstanding results in a difficult
industry, and a good bank will provide credit
to the right owners/managers.
Again, communication comes into play
here. Banks want to know what you are
doing and what you plan to do in the future.
Keep them involved in your business plan.
What risks should business owners be aware
of during turbulent times?
Today business owners don’t only have to
worry about their own actions. Businesses
also need to know what their business partners, suppliers and customers are doing in
their businesses. Receivables risk is greater
than ever. A business should re-examine its
customers. What is their financial condition
and ability/history of payment? Don’t assume
that a ‘legacy’ customer will pay just as it
always has. Communication is also important with those with whom you do business.
Are these tighter credit standards something
businesses will be able to survive?
Most businesses have an uncanny ability to
do what they need to in order to survive
some hardship. The real difficulty for those
businesses on the margin is to find the ability
to fund the growth when demand ramps
back up. It is at that point that the flexibility
afforded by a strong balance sheet becomes
imperative.
STEVE HENDRICKS is a commercial banking manager with FirstMerit Bank. Reach him at [email protected] or
(330) 384-7546.
