If you've been looking to borrow so you can better meet the challenge of today's testy business environment, no one needs to tell you about the reality of the current "credit crunch." And, if you are yet to look for a credit facility, you may be in for what may turn out to be an unpleasant surprise.
The Federal Reserve's July 2008 survey of senior loan officers makes clear what's happening with lending to businesses. About 65 percent of the banks involved tightened their lending practices for small businesses in the last three months, a figure that's up from 50 percent from the previous quarter. About 60 percent also reported more stringent credit standards for loans to large and middle-market companies. On top of that, a very high percentage of the banks had "increased spreads of loan rates over the cost of funds." In other words, the credit squeeze is real and there's no sign that it will change in the near future.
Whether it's implementing products to meet changes in the economy, realigning their business operations or attempting to grow, credit is the lifeblood of business. And it should not be forgotten that many companies are attempting to make changes that will reduce operating costs that have been driven skyward as a result of dramatic increases in energy costs.
What makes the current situation especially problematic for businesses is that even companies with gold-plated credit are reporting borrowing problems such as tighter underwriting standards and more stringent terms. The degree of difficulty seems to vary from one part of the nation to the other.
In an article on how to beat the credit squeeze, one writer made several fairly reasonable suggestions and then added, "go out and get more sales." While this may be easy for someone looking in from the outside to say, anyone who has been faced with obtaining credit would only roll their eyes at such a statement.
While the credit picture is more than slightly bleak, the funding faucet is not turned off. Money is available. With that in mind, here are steps to take to make your business more attractive to a lender:
1. Have a marketing plan that takes into account a tight economy. This is the antithesis of "go out and make more sales," which is poor advice because it's not a plan.
If someone were to ask you how you planned to repay a loan or make lease payments for new equipment, what would you tell them? Many times, business owners and managers give some type of general response that lacks specifics. What's needed is a plan that's on paper that describes in detail exactly what you would do to produce the necessary revenue. Then you'll be ready when it's needed.
Because businesses acquire new equipment either to increase revenue or to reduce costs, here are several key questions you will want to answer in your marketing plan: If you are borrowing to invest in new equipment, for example, why is it needed? What benefits will it bring to your business? Is it to replace outdated equipment or will it allow you to enter a new market? If it's a new market, how do you plan to penetrate it? If the new equipment will allow you to reduce operating costs, what will be the actual savings?
Spending time developing your "road map" pays off. It's a tool for creating credibility that you will have the cash flow to make your payments. It also enhances your credibility as a responsible businessperson. All of which can have a positive impact on the terms and interest rate.
2. Get your company's financials in order. Owners of closely held companies are understandably frugal. They almost have what seems to be an innate ability to keeps costs down. Unfortunately, that often extends to paying for such things as accounting services, which are sometimes dismissed as "unnecessary luxuries." Yet, without current financials, you can count on being turned down when requesting credit.
Unless your financial house is in order, the chances of obtaining the financing you need at a competitive rate are extremely slim.
Having adequate financials is helpful in another way. You're going to be faced with completing a credit application,the bane of many an entrepreneur's existence. Current financials give you a leg up in filling out a credit app because you have the necessary information ready.
It's no accident that those requesting financing often fail to follow through on filling out the credit app for one main reason: they lack the required financial data.
3. Demonstrate that you are serious. We have had such a long run on easy credit that it's difficult to come to terms with the fact that the times have changed. It was only a few years ago that lenders were standing in line to "give" money to almost any business for almost any reason and for almost any terms.
Those days are gone. Today, lenders want to know that entrepreneurs are serious and they measure commitment in tangible ways. For example, a company needs new equipment, but doesn't have room for its replacement until the old equipment is sold. While this is a real problem, letting it drag on sends the wrong message to possible lenders.
In the same way, newer companies, particularly those that have not been in business for at least three years or those that are partnerships need to be prepared to sign personally when borrowing. Having a spotless credit record is always a plus, but so is an adequate track record.
When it comes to partnerships and Limited Liability Companies, the principals can find it difficult understanding why a personal guarantee is such an issue. Breakups occur, often unexpectedly, leaving a business with only half of the management team. Experience indicates that more often than not, a business goes through a difficult period when a partner leaves. Also, with these structures, the company profits flow to the individuals for tax purposes, thus requiring the personal guarantee to support the business credit.
Last, but far from least, it's in any business borrower's best interest to make sure the company looks good in every way, whether it's the physical appearance or its professionalism. Something as basic as the active participation in a trade association or having a professional and detailed website are just a couple more indications that a business is serious about its industry and the future.
Businesses that are willing to take these three issues seriously have a very good chance to obtain the credit they need to grow their operations. The "credit crunch" has something of a Darwinian quality to it; namely, those companies that are best prepared to thrive will be able to do so.
Edward A. Testa is Vice President of Sales at Greystone Equipment Finance Corporation based in Burlington, Mass., a company that specializes in equipment lending and leasing. Testa has more than 20 years experience in the equipment financing industry and can be contacted at firstname.lastname@example.org or 888-894-4332.