The current credit environment has changed drastically from what it has been in past years. Credit is tighter than ever, making it more and more difficult to obtain loans. Lenders are risk adverse regarding whom they lend to, although recently there has been some improvement in lenders’ attitudes.
“Lenders are looking very closely at their customers and potential borrowers,” says Paul R. Anderson, the director of assurance services with GBQ Partners LLC. “They’re asking a lot more questions about borrowers’ financial situations and their outlooks going forward. Most of this is driven by banks’ risk aversion and wanting to avoid potential losses.”
Smart Business spoke with Anderson about how to work with lenders in this credit environment and what new loans are available to borrowers.
What should you understand about working with lenders in this credit environment?
The first is to understand that the environment is not like it was a few years ago, when credit was easier to obtain. You need to have a greater degree of patience for the process. The bank is also going to go through a lot more due diligence on its part, so you have to be prepared for many more questions and be willing to provide a lot more information. You need to be willing to work with the lender to help them be prepared to answer the questions they will receive as the loan moves through the approval process.
What new loans are available to businesses?
One new loan that has become more prevalent in Central Ohio is an asset-based loan. The lender will agree to advance funds based on specific assets owned by the company, primarily accounts receivable and inventory. The total amount that can be borrowed is determined based on applying the advance rate, which is a percentage usually between 40 to 70 percent, to the amount of qualifying accounts receivable and inventory. Both the advance rate and what are qualifying accounts receivable and inventory are specified in the loan agreement.
The lender will require periodic verification of these assets, since the loan is tied directly to these balances and accounts. One of the bank’s internal auditors or sometimes a third-party auditor will perform certain tests to verify the accuracy and completeness of the qualifying accounts receivable and inventory.
This type of loan is generally used for manufacturing companies but can also be used for service companies with a sizeable amount of accounts receivable. We’re seeing this loan being used more as an alternative, as businesses are being challenged on servicing more traditional lines of credit, financing or term notes.
