Last week I took part in a lender roundtable sponsored by US Senator Roland Burris. In that panel, there were people from the regulatory agencies (OCC and FDIC) and also people from the Small Business Administration. The main driver for this roundtable was our role in creating access to capital for small businesses.
The questions I was asked were the following:
Q: Which are key factors to qualify for lending in a tough economy?
A: The most important factor is good management. A company that can identify and make market adjustments proactively is always welcomed. Most of these companies will experience losses, but will be able to cash flow their business and weather the storm. I have a client in the manufacturing sector that identified he was going into rough waters; he made arrangements with the bank to modify his payment structure. He also looked at the type of business he was getting and became choosier when it came to signing up new business. He wanted to get higher margin work, not just volume. He also adjusted his workforce to adapt to the new market conditions. He did more with less, and when the rebound is sustained he will reap the rewards of that belt tightening.
Q: Of the six Cs in lending, which is most important in a tough economy?
A: The six Cs of credit are: Character, Credit, Capacity/Cash flow, Capitalization, Collateral, and Conditions. They are all important, but at this time Capacity/Cash flow has become critically important. Cash flow is what services the debt. Collateral is good, but it does not pay the bills. In addition, the current devaluation in collateral values are a concern for any lender. In these tough economic times, cash preservation is critical for a business to succeed. When you are looking for financing, cash flow will be looked at more closely than collateral being pledged. Of course, it is also important to mention that Character is also a main driver because you can have all the cash flow in the world, but if there are questions on your character it will be difficult to get financing.
Q: How are banks adjusting to new businesses that do not have collateral to pledge?
A: (This question was asked in relation to technology companies that have intellectual property and nothing else to pledge as collateral.) The financing of a business such as a technology company will be correlated to the current business cycle they are in. For example, if you are a technology startup company, the prudent thing to do is to look at an equity raise vs. a debt raise. This is because these types of companies will not have adequate cash flow reserves to pay the debt over time. For more established businesses, a track record of sales (at least 12 months) and positive cash flow for the majority of those months will give you a better shot at financing, as long as the debt request makes sense.
Late last month, the National Small Business Association (NSBA) released the results of a survey of small business owners which found the following bank-related trends:
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"When asked what are the most significant challenges facing their business, nearly one-third (29 percent) said lack of available capital-that's up from 24 percent just six months ago."
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"Eighty percent (four out of five) small business owners report that their company has been impacted by the credit crunch."
This is consistent to what we see at Ridgestone. Right now, many businesses are facing tremendous working capital challenges. Their Accounts Payable may be stretched to the limit. Their lines of credit may be fully extended. We know this makes growth difficult. Most businesses need to purchase raw materials and machinery in order to produce the goods they sell. The old saying, “It takes money to make money,” is as true today as it ever was. So where does the money come from?
We suggest that for many businesses, it could come from the SBA or USDA. Unlike traditional working capital, which advances funds based solely on accounts receivable or inventory, the SBA and USDA look at the equity available in a business’ real estate or equipment as well as accounts receivable and inventory. SBA or USDA term financing can help businesses deal with cash flow issues and refinance debt using longer loan terms and amortization schedules – essentially “rebalancing the balance sheet.”
Business owners need to be creative and tenacious when looking for funding. Of course, it is important to remember that there is no substitute for running your business well. Although no bank wants to repeat yesterday’s mistakes by funding businesses that are not likely to succeed, most banks are interested in supporting their communities and the businesses that create jobs.
As specialists in government-guaranteed loans, we will admit that the paperwork can seem overwhelming to someone who has never been through the process before. At Ridgestone, SBA and USDA loans are our focus. That’s why we are the number one USDA lender in the United States and in the top twenty nationally for SBA lending.
Do you have questions about government-guaranteed loans?