While the media slam us with headlines detailing the abundance of
foreclosures and reporting on what has been described as a mortgage melt-down in recent months, business owners
must evaluate how banks’ 2007 earnings
performance, the grim housing industry and
low consumer confidence will affect their
ability to profit and grow this year.
Certainly, this market is not kind to companies with borderline credit or lukewarm
goals for the future. A solid business plan
and clear understanding of how your bank
is underwriting loans and evaluating
requests for capital are critical.
“The greatest concern for the business
community is that an unstable housing
market affects consumers’ decisions to
buy anything — cars, goods, services,” says
Craig Johnson, president and CEO,
Franklin Bank, Southfield, Mich. “There is
a wealth trickle-down effect.”
For banks, the pressure is on to filter out
risky business. For companies, the emphasis is on putting their best foot forward.
Further, for businesses prepared to grow,
opportunities may exist with institutions
that are seeking new business by offering
attractive commercial and industrial lines
of credit to replenish losses endured in the
residential mortgage space.
Here, Johnson provides an update on
how banks are responding in a tough economy and how companies can partner with
institutions to gain new business.
How has the mortgage crisis and banks’ poor
earnings affected business owners’ outlook?
As home values drop, there is consumer
uncertainty, and people are reluctant to
spend dollars in the marketplace. People
are more cautious, and this eventually
affects businesses in every sector. Whether
your company is a supplier or a provider of
goods and services to end users, you’re
feeling the crunch from a marketplace of
fickle consumers. Consumers and businesses alike are looking for ways to save
money and cut costs. It is clear that companies are more defensive now — the
same economic insecurity their consumers
feel is also affecting industries in a very
material way.
In the wake of record foreclosures, how are
banks responding to business customers?
Earning reports alone will show you
why banks are underwriting much more
conservatively than they did in the past.
Banks are probably going to ask for more
collateral, and you may consider exploring alternatives to traditional bank loans,
including loans backed by the Small
Business Administration (SBA). You may
want to research local economic development agencies and unconventional financing options that banks can facilitate.
Equity partners are also an option.
Essentially, it’s important to keep an open
mind and think beyond the basics in a
time when banks, in general, are holding
their purse strings more tightly.
Is there a bright side for businesses?
Yes, actually. If you are in the position to
grow your business, and you have consulted carefully with your advisers, economic conditions have created opportunities because of the low cost of capital.
Also, many of the banks that have cut
back their involvement in real estate business are focusing attention on traditional commercial and industrial lines of business. You may notice pricing structures
that are particularly favorable in this
space, and a number of financial institutions are eager to outfit their successful
business customers with financial vehicles to grow.
This is good news if your credit is solid
and you’ve got a well-laid plan for growth.
But I stress the importance of consulting
with your advisers — really communicating your financial performance, goals, the
good and the bad. Now is not the time to
take chances. In good times, a business
may be able to rebound quickly. But in
this economy, if you make a mistake, it
could be fatal.
When should a business owner be concerned
about his or her relationship with a bank,
given the earnings news at the first of the
year?
If you have lines of credit or term loan
facilities with those institutions that have
been exposed to financial difficulties, it’s
critical to meet with your account manager and talk frankly about where you business is today and your plans for the
future. Get a feel for where the institution
is, and don’t accept the response, ‘Well,
there’s no change.’ Ask probing questions,
and make sure that you are comfortable
with the answers in terms of how the
bank views its relationship with you relative to its strategic plan. Determine
whether the bank’s strategy still aligns
with your business needs.
Prepare for this discussion by assembling your business budget and forecasting what your financial needs will be
down the road. Have an open, honest conversation. If you have maintained a strong
relationship with your banker, he or she
will candidly offer advice and direct you
as you plan for growth.
CRAIG JOHNSON is president and CEO of Franklin Bank in Southfield, Mich. Reach him at [email protected] or (248) 386-9860.