As businesses negotiate the economy
and strategize ways to weather the
storm, their reliance on bankers for information and resources has never been
greater. Business owners are asking: How
safe is my money, really? What does the
bailout mean for my business?
“More than anything, you have to take a
glass-half-full approach to your business
these days, look beyond everything you
hear and read, and try to find additional
opportunities,” says Craig Johnson, president and CEO of Franklin Bank in
Southfield, Mich.
This optimism can be difficult to muster,
particularly with national news focused on
Detroit’s ailing auto industry and the
region’s business community anticipating a
trickle-down effect. There is stress, but
there also is security, such as the federal
government’s support of banks and the
promise of an upturn.
Smart Business poses business owners’
frequently asked questions, which Johnson
answers here.
What does the bailout mean in terms of bank
security? Is my money safe?
The federal ‘bailout’ provides the
Troubled Assets Relief Program (TARP)
money for additional capital and gives
individuals and businesses confidence
that the fundamental banking system is
sound. As the program was initially laid
out, the government would have bought
bad assets off banks’ books. It was
reworked so the government will receive
an equity position in addition to the loan it
puts in so companies have sufficient capital to weather the storm. And, in return,
the government gets a preferred dividend
yield — a return interest.
The term ‘bailout’ is a misconception.
This is an equity play and, in the long-run,
the government will make money on this
transaction and that’s important for people
to understand. The plan streams capital
into the banking system so it can recover
and, in effect, pass that capital through
businesses to help prop up the economy. In
return, the government collects interest on
its investment and receives an equity
return in the form of stock warrants. So, is your money safe at the bank? Absolutely.
Think of ‘bailout’ this way: The government is making sure that banks don’t bail
out on you.
Will credit be available to businesses requiring growth capital?
We are still making home loans, car
loans, business loans. The standards have
tightened, but the reality is that they are
back to where they were 10 or 15 years ago
when banks were more conservative
lenders. Credit availability has not been
entirely cut off, but banks are going back to
the basics. That means requiring more cash
going into transactions, tightening pricing,
taking a closer look at collateral that’s
securing loans and examining sources of
repayment. Most important, we are looking
for complete lending relationships. For a
long time, banks around the country operated in a transactional way, focusing on
product and not people. Our approach is to
help manage a business owner’s entire
banking portfolio. Loans, essentially, are
based on trust. Relationships are the only
way for banks to gain the trust needed to
extend loans in these economic times.
How are banks scrutinizing existing lines of
credit — will it be difficult for businesses to
maintain the level of credit they currently
have?
Banks are looking more closely at the
credit scores of business owners, and they
are setting parameters. We are examining
our customers’ line of credit usage and
spending time discussing their 2009 business projections. Banks must manage the
risk within their portfolios, and if there is
opportunity to mitigate risk by not renewing relationships that will prove detrimental to the banks’ business down the road,
then banks are executing those decisions.
For instance, if a business owner’s personal credit score is below the bank’s benchmark, the business itself is suffering and
the owner has no plans for resuscitating
lost profit, the banker may be less inclined
to renew this company’s line of credit. Of
course, these decisions are made on a
case-by-case basis, but the message is that,
yes, banks are investigating individuals in
their business line portfolios. And again,
this is where strong client-banker relationships can tip the scale and work in a business owner’s favor.
What advice can you offer businesses for first
quarter 2009 and beyond?
One of the most common questions we
field at the bank is, ‘What do you think will
happen?’ That may be the only question we
can’t answer. The fact is, no one is quite
sure how long this recessionary time will
last, and the trickle-down effects of the
financial and mortgage crises remain to be
seen. The curveball is our American auto
industry and its home base here in Detroit.
We’re all concerned. But now, we need to
focus our energy on opportunity — diversification. Consider your client base and
your market demographic. Aggressively
seek new business. Pursue R&D, but spend
dollars prudently and be sure the investments you make now will impact your
future.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at [email protected] or
(248) 358-6459.
