How the lending landscape is looking for 2021

As businesses look forward to 2021, many unknowns put their plans in a state of perpetual flux. The uncertainty impacts many areas, including the lending landscape.
“Regular and frequent financial evaluations are recommended throughout the end of the year and into 2021,” says Kurt Kappa, Chief Lending Officer at First Federal Lakewood.
In order to gain surer footing, some companies will plan to transition into new lines of business (and away from others). Executing expansion may require outside financing from lenders. Companies considering growth should keep lines of communication with lender partners open, especially as banks may increase credit scrutiny in uncertain times.
Banks want and need to understand a business’s plan for the future. If a business foresees transitioning into a new line of business, lenders want to be aware of and account for a business’s change in revenue as it pivots into new territory. Businesses planning on staying the current course need to share the rationale and forecasts with current lenders to be assured credit facilities can remain intact.
Smart Business spoke with Kappa about the lending year ahead and how companies in transition can work with their lender to keep vital financing options open.
What lending might companies need in the coming year?
More companies seem to be feeling confident about where they are and where they’re heading. Many have adjusted to the market and are seeing positive results. However, the banking industry, particularly the larger banks, are re-examining their overall market and industry exposure and may be pulling back and reassessing their credit risks. This may affect some banks’ appetites for extending credit or making loans, which could affect a company’s planned trajectory.
What funding are companies most interested in now?
Generally, a lot of companies that are looking to grow want financing to secure the funds necessary to reinvest in their companies. Some want to make capital purchases, like new equipment, now, so they can write it off during this tax year. Others may be exploring continued expansion through acquisitions, with a big push for end-of-year transactions.
Some business owners are weighing an exit. That’s typically the case where owners don’t have a succession plan, aren’t looking to grow through acquisitions and might not want the uphill battle through a challenging market. These owners are looking to exit the market now and cash in.
How might banks make lending decisions in 2021?
The pandemic has had a huge impact on all businesses around the world. Banks will want to see that businesses have a plan, preferably one that gives the bank confidence that the company can react to challenges as they arise.
Typically, banks want to see prior results and year-end finances, but there’s an understanding that those may have been disrupted by the pandemic. Financial projections are going to be key as financing decisions are made for 2021.
What conversations should businesses in transition have with their banker?
It’s really going to come down to the monthly forecasts, month-by-month cash flow projections, and profit and loss statements. It’s also about making sure the company has the right team in place to manage the transition. Sometimes, when a company pivots to something new, the expansion draws considerable attention away from the core business that made it successful. So the management team and ownership really need to work hand-in-hand to make the transition a success.

It’s going to continue to be a challenging year. Businesses should keep their bank and their advisers apprised of what’s happening in the company with forecasts and projections that show that the business is making the organizational changes needed to be successful. The chances of success increase when everyone is on the same page.

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