By: Edward Testa
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 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% of the banks involved tightened their lending practices for small businesses in the last three months, a figure that’s up from 50% the previous quarter. About 60% also reported more stringent credit standards for loans to large and middle-market companies. Plus, 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 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 is even companies with gold-plated credit are reporting borrowing problems such as tighter underwriting standards and more stringent terms.
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 and 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.