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.