Fifth Third Bank on recession Featured

8:00pm EDT August 26, 2009

You’ve suffered through the ups and downs of the recession for the past year and a half. You’ve watched your competitors and other businesses shut down and the number of your customers dwindle. You may even have made significant cutbacks yourself in order to survive.

While the recession is not yet over, many economists predict that it will end this year. And now is the time to begin preparing your business to emerge from the recession and position itself to take advantage of new opportunities.

“There will be many changes in your market and industry once the economy starts to improve,” says Timothy P. Kelly, vice president of commercial banking with Fifth Third Bank. “The competitive landscape will be different, as some weaker competitors and vendors may not survive.”

Smart Business spoke with Kelly about how the recession’s impact on financial institutions has impacted other businesses and how business leaders can prepare to emerge from the recession.

What steps can business leaders take to help them emerge from the recession?

You should always be diligent about the cost of operations and carrying inventory, especially when coming out of a recession. Companies that have survived past recessions typically made tough decisions quickly regarding managing operations. No one likes to eliminate staff, cut production or limit inventory, but if you do that early, you’re better positioned to come out of the recession. Avoiding as much leverage as possible during slow times will allow you to leverage more during good times.

You will also need to access credit in order to switch from reducing inventory to building inventory. The availability and cost of credit are important factors during this transition period. In-depth analysis of current market conditions and formal projections, along with business plans, will be useful in this step. Businesses that have a good understanding of their operations and markets will be able to obtain the working capital necessary to invest in inventory and production capabilities.

What other advice would you give a business leader?

You also need to take a closer look at your industry, operations and future opportunities, and work closely with lenders so that you have the right structure and amount of credit in place. This should allow you to prosper in the improving economic environment and take full advantage of opportunities. Avoiding losses due to failing customers and having access to key suppliers, including your bank, is crucial to surviving and thriving as the economy improves.

Companies that are addressing customer credit issues also need to look at account receivable insurance. While such coverage can take many different structures, the risk associated with trade credit can be significantly, if not entirely, reduced. Receivable insurance also provides an additional comfort level that translates into more favorable borrowing arrangements secured by insured receivables.

How can you motivate employees to help you emerge from the recession?

Employee morale has been overshadowed during the recession. You need to tackle the issue of a depressed employee base in order to count on that base to be productive when the time comes.

Engaging employees and keeping them informed about the industry and the impact of the economy on the company will help them get energized and excited.

How will the recession’s impact on financial institutions continue to affect other businesses?

The events that financial institutions have experienced during the recession, including credit losses, ownership changes and failures, will continue to impact the industry for years to come.

With more emphasis placed on the credit underwriting process, clients can expect more questions as banks try to understand them, their needs and their industry. Bankers will likely request more detailed projections, along with a deeper analysis of historical operations in order to structure credit appropriately.

Asset valuation will also be looked at more closely in light of falling prices. Borrowers can expect more requests for updated appraisals on all property as well as current asset valuations or field audits of working capital assets.

This will allow banks to better understand the risks associated with each borrower and industry.

What other financial changes have resulted from the recession?

Banks have had to gain a better understanding of their own funding costs as well as determine rewards for taking credit risks. Prime rate is also no longer a valid index for pricing commercial loans.

Costs of capital for a bank were determined to be much higher than the stated federal funds rate and consisted of the cost of deposits, equity and government TARP funds. Because of quickly escalating credit losses, interest rate credit risk spreads were determined to be significantly underpriced.

Borrowers now may see the London Interbank Offered Rate-based indexes as well as increased credit spreads used to calculate borrowing costs.

The cost of debt is still low, despite a new rate index and higher credit spreads required by lenders. Banks cannot lend money at a loss for too long, but the availability of credit is much more important now than the cost.

Timothy P. Kelly is vice president of commercial banking at Fifth Third Bank. Reach him at (513) 579-4165 or tim.kelly@53.com.