Despite the trend toward more conservative lending practices, banks are still making loans to strong businesses looking to grow, says James Eccher, president of Old Second National Bank.
“There are definitely tighter lending standards today than there were in the last several years, and many banks are looking inward, trying to shore up their balance sheets before they really go out and look for new business opportunities,” says Eccher. “But for a large number of banks, to some degree, it’s business as usual.”
Smart Business spoke with Eccher about how to obtain financing in difficult economic times and what struggling companies can do to position themselves as viable candidates for loans.
Are banks still lending to businesses?
Credit is abundant. And while there are some banks that aren’t lending, many are still looking to lend money to credit-worthy clients. The caveat, though, is that businesses must have strong cash flow, solid collateral and be able to provide a personal guarantee.
There is no conventional loan program out there today for struggling businesses that are looking for relaxed underwriting standards. If a business is unable to secure traditional bank financing, it may seek financing from other sources, such as private equity partners or, in some cases, consumer finance companies. But it is not true that banks aren’t lending. Lending is the lifeblood of a bank’s business; that’s how a bank generates a great deal of its revenue.
Banks want to lend, but they are being more careful when extending credit.
What can a business owner do to prepare for a successful meeting with a banker?
Businesses can make a great first impression by preparing a portfolio that includes a comprehensive business plan, business and personal financial statements, forecasts and past tax returns. Immediately lay out the challenges the business faces don’t make the bank uncover problems by looking through the file.
Transparency is always the best policy. If your business has experienced challenges, identify solutions and a turnaround plan. How will 2010 be different than 2009? Will you add a new service, or extend a product line, or reach a promising new customer demographic? Tell your story.
In turn, the bank should be listening, providing suggestions and selling its services to you.
What options are available for businesses that need financing to grow?
Businesses looking to acquire a building or a piece of equipment can apply for an SBA 504 loan, which requires a down payment of as little as 10 percent. The Small Business Administration funds 40 percent of the loan and the bank funds the remaining 50 percent.
What’s really attractive about this loan structure is that government stimulus funds have allowed the SBA to waive closing fees. This is significant because typical closing fees on a $1 million transaction could be up to $10,000.
Also, the interest rate on the SBA debenture is fixed for 20 years in the low to mid 5 percent range, which is well below market rates.
In addition, you should talk to your bank about structured payment programs based on the cyclicality of your business. Many banks will work to tailor solutions for your needs, but there is no silver bullet lending solution for a company that is struggling from a cash flow perspective.
If a business has been turned down for a loan, what is the next step?
First, ask your banker why. It’s important to understand why you were turned down. Is there something systemically wrong with the business or operation?
Next, ask the banker, ‘Can you help me?’ Many businesses just move on to the next bank if they get turned down instead of finding out why they were turned down and asking for help so they can better position themselves as an attractive borrower.
Bankers are well connected to turnaround consultants and a stable of CPA firms and attorneys who can provide good counsel. Think of your banker as a resource, not a commodity. Reputable financial institutions will take on the role of adviser, whether or not they grant the loan, and work with you to help get the business back on track.
You may seek financing from an alternative resource until the balance sheet and cash flow activity improve, but in the meantime, it’s important to press your banker and ask for business advice.
What is the credit outlook going forward?
It’s difficult for most bankers to look forward more than 90 days because they are seeing new scenarios develop every day in the industry. But if I had a crystal ball, I would foresee an extended period of low interest rates. Slowly but surely, banks are cleaning up their balance sheets and, as they get healthier, their willingness to extend additional credit will increase.
I also think there will be many more bank failures this year as many community banks struggle to manage through the most severe real estate market in decades. There will need to be stabilization in the housing market and an improved employment outlook before many banks will feel comfortable lending again.
James Eccher is president of Old Second National Bank in Aurora, Ill. Reach him at (630) 966-2433 or firstname.lastname@example.org.