As businesses negotiate the economy and strategize ways to weather the storm, their reliance on bankers for information and resources has never been greater. Business owners are asking: How safe is my money, really? What does the bailout mean for my business?
“More than anything, you have to take a glass-half-full approach to your business these days, look beyond everything you hear and read, and try to find additional opportunities,” says Craig Johnson, president and CEO of Franklin Bank in Southfield, Mich.
This optimism can be difficult to muster, particularly with national news focused on Detroit’s ailing auto industry and the region’s business community anticipating a trickle-down effect. There is stress, but there also is security, such as the federal government’s support of banks and the promise of an upturn.
Smart Business poses business owners’ frequently asked questions, which Johnson answers here.
What does the bailout mean in terms of bank security? Is my money safe?
The federal ‘bailout’ provides the Troubled Assets Relief Program (TARP) money for additional capital and gives individuals and businesses confidence that the fundamental banking system is sound. As the program was initially laid out, the government would have bought bad assets off banks’ books. It was reworked so the government will receive an equity position in addition to the loan it puts in so companies have sufficient capital to weather the storm. And, in return, the government gets a preferred dividend yield — a return interest.
The term ‘bailout’ is a misconception. This is an equity play and, in the long-run, the government will make money on this transaction and that’s important for people to understand. The plan streams capital into the banking system so it can recover and, in effect, pass that capital through businesses to help prop up the economy. In return, the government collects interest on its investment and receives an equity return in the form of stock warrants. So, is your money safe at the bank? Absolutely. Think of ‘bailout’ this way: The government is making sure that banks don’t bail out on you.
Will credit be available to businesses requiring growth capital?
We are still making home loans, car loans, business loans. The standards have tightened, but the reality is that they are back to where they were 10 or 15 years ago when banks were more conservative lenders. Credit availability has not been entirely cut off, but banks are going back to the basics. That means requiring more cash going into transactions, tightening pricing, taking a closer look at collateral that’s securing loans and examining sources of repayment. Most important, we are looking for complete lending relationships. For a long time, banks around the country operated in a transactional way, focusing on product and not people. Our approach is to help manage a business owner’s entire banking portfolio. Loans, essentially, are based on trust. Relationships are the only way for banks to gain the trust needed to extend loans in these economic times.
How are banks scrutinizing existing lines of credit — will it be difficult for businesses to maintain the level of credit they currently have?
Banks are looking more closely at the credit scores of business owners, and they are setting parameters. We are examining our customers’ line of credit usage and spending time discussing their 2009 business projections. Banks must manage the risk within their portfolios, and if there is opportunity to mitigate risk by not renewing relationships that will prove detrimental to the banks’ business down the road, then banks are executing those decisions. For instance, if a business owner’s personal credit score is below the bank’s benchmark, the business itself is suffering and the owner has no plans for resuscitating lost profit, the banker may be less inclined to renew this company’s line of credit. Of course, these decisions are made on a case-by-case basis, but the message is that, yes, banks are investigating individuals in their business line portfolios. And again, this is where strong client-banker relationships can tip the scale and work in a business owner’s favor.
What advice can you offer businesses for first quarter 2009 and beyond?
One of the most common questions we field at the bank is, ‘What do you think will happen?’ That may be the only question we can’t answer. The fact is, no one is quite sure how long this recessionary time will last, and the trickle-down effects of the financial and mortgage crises remain to be seen. The curveball is our American auto industry and its home base here in Detroit. We’re all concerned. But now, we need to focus our energy on opportunity — diversification. Consider your client base and your market demographic. Aggressively seek new business. Pursue R&D, but spend dollars prudently and be sure the investments you make now will impact your future.
CRAIG JOHNSON is president and CEO of Franklin Bank, Southfield, Mich. Reach him at CLJohnson@franklinbank.com or (248) 358-6459.