Perhaps the only thing tougher than
understanding the local weather pattern is understanding today’s credit markets. Talk of “frozen” credit is common
this winter.
“I constantly hear questions from my customers about whether banks are still lending money,” says John Covington, vice president with Fifth Third Bank in Cincinnati.
“We’re definitely still doing deals. The idea
that credit is not available is simply untrue.”
That does not mean, however, that banks
are not exercising strict discipline in evaluating loan requests.
Smart Business asked Covington to sort
myth from reality.
So, capital is available?
Capital is available. There is always
money for the right purposes. Today, however, capital is extremely valuable. Most
banks are increasingly sensitive about
where they allocate their resources. We
have chosen to be careful about some
industries, but we have money for best-in-class firms. Our capital is going to go to people with their finger on the pulse of their
business. Remember, we’re making a bet
on you, too. But we want to lend; I still have
a loan growth goal to reach in 2009. So, yes,
there is capital.
Will federal bailouts help local businesses
get money?
The short answer is ‘yes.’ First, if your
bank applied, and was approved, to receive
federal TARP (Troubled Asset Relief
Program) money, that should be interpreted as a positive event. In my opinion, those
banks that got federal help were given a
resounding vote of confidence by the Fed.
Secondly, this money will help banks
shore up balance sheets weakened by
falling market values on investments and
troubled loan portfolios. This means there
is capital to lend.
What about loans for capital projects or startups?
Many small business owners are worried
about a capital shortage.
Capital projects, lines of credit, equipment loans and similar requests are all part
of the same capital bucket. They will be
evaluated to ensure the purpose of the
request and the ultimate repayment
sources make sense. However, it’s a tough
time to buy or start a business. In addition
to the traditional repayment sources, be
prepared to contribute personal equity. This
sends the right message to the bank that
you are as committed to the deal as it is and
that you are willing to stand behind your
business plan with your own money.
If you have an unused line of credit, we’ll
be asking if it is truly necessary. That said,
there is no reason to feel you have to renew
your line early or increase it just so it’s
there. We’ll be asking the same questions
we always do, whether it is for a renewal or
an increase. We’ll look at who is running
the company, whether the repayment plan
is reasonable, and how the business sector
is doing.
Should I expect higher loan costs?
Banks today will pay more attention to
getting the right return for their risk.
Capital is expensive. Longer-term fixed rates will remain more expensive than 180-or 360-day revolving rates. And, we all have
to answer to the federal government.
No bank wants to lose market share, so
we are sensitive to what other banks are
doing. But the days of freewheeling, under-prime loans (not to be confused with the
sub-prime mortgages) are over. All banks
today appreciate the need to allocate capital effectively and to be rewarded for their
risk. No one ever wants to lose a deal on
rate, however, I have a responsibility to my
shareholders to obtain the proper yield
on a transaction or we will pass on the
opportunity.
Fees are another area not always handled
uniformly in the past. Today, we are examining fees, too. For example, if there are
violations of the financial covenants, triggering an event of default under the loan
documents, we expect to be compensated
to restate these measures.
Is there any good news?
It seems odd to say, but trying times like
this are inevitable, although not normally
to this degree. Nonetheless, they force
managers to ask the hard questions about
unprofitable lines or examine all expense
items. Look at places to trim back — take
this time to make your business more efficient. I assure you, banks notice when
management teams are quick to respond
and not afraid to make the tough decisions.
Be prepared to thoroughly discuss your
financial information. Don’t be surprised if
your banker wants to dig deeper into your
statements or request additional information. In this way, you will truly understand
your business. However, if you have good
financial practices in place, there is less
need to worry.
JOHN COVINGTON is a vice president in the business banking group with Fifth Third Bank in Cincinnati. Reach him at
[email protected].
