While the media slam us with headlines detailing the abundance of foreclosures and reporting on what has been described as a mortgage melt-down in recent months, business owners must evaluate how banks’ 2007 earnings performance, the grim housing industry and low consumer confidence will affect their ability to profit and grow this year.
Certainly, this market is not kind to companies with borderline credit or lukewarm goals for the future. A solid business plan and clear understanding of how your bank is underwriting loans and evaluating requests for capital are critical.
“The greatest concern for the business community is that an unstable housing market affects consumers’ decisions to buy anything cars, goods, services,” says Craig Johnson, president and CEO, Franklin Bank, Southfield, Mich. “There is a wealth trickle-down effect.”
For banks, the pressure is on to filter out risky business. For companies, the emphasis is on putting their best foot forward. Further, for businesses prepared to grow, opportunities may exist with institutions that are seeking new business by offering attractive commercial and industrial lines of credit to replenish losses endured in the residential mortgage space.
Here, Johnson provides an update on how banks are responding in a tough economy and how companies can partner with institutions to gain new business.
How has the mortgage crisis and banks’ poor earnings affected business owners’ outlook?
As home values drop, there is consumer uncertainty, and people are reluctant to spend dollars in the marketplace. People are more cautious, and this eventually affects businesses in every sector. Whether your company is a supplier or a provider of goods and services to end users, you’re feeling the crunch from a marketplace of fickle consumers. Consumers and businesses alike are looking for ways to save money and cut costs. It is clear that companies are more defensive now the same economic insecurity their consumers feel is also affecting industries in a very material way.
In the wake of record foreclosures, how are banks responding to business customers?
Earning reports alone will show you why banks are underwriting much more conservatively than they did in the past. Banks are probably going to ask for more collateral, and you may consider exploring alternatives to traditional bank loans, including loans backed by the Small Business Administration (SBA). You may want to research local economic development agencies and unconventional financing options that banks can facilitate. Equity partners are also an option. Essentially, it’s important to keep an open mind and think beyond the basics in a time when banks, in general, are holding their purse strings more tightly.
Is there a bright side for businesses?
Yes, actually. If you are in the position to grow your business, and you have consulted carefully with your advisers, economic conditions have created opportunities because of the low cost of capital. Also, many of the banks that have cut back their involvement in real estate business are focusing attention on traditional commercial and industrial lines of business. You may notice pricing structures that are particularly favorable in this space, and a number of financial institutions are eager to outfit their successful business customers with financial vehicles to grow.
This is good news if your credit is solid and you’ve got a well-laid plan for growth. But I stress the importance of consulting with your advisers really communicating your financial performance, goals, the good and the bad. Now is not the time to take chances. In good times, a business may be able to rebound quickly. But in this economy, if you make a mistake, it could be fatal.
When should a business owner be concerned about his or her relationship with a bank, given the earnings news at the first of the year?
If you have lines of credit or term loan facilities with those institutions that have been exposed to financial difficulties, it’s critical to meet with your account manager and talk frankly about where you business is today and your plans for the future. Get a feel for where the institution is, and don’t accept the response, ‘Well, there’s no change.’ Ask probing questions, and make sure that you are comfortable with the answers in terms of how the bank views its relationship with you relative to its strategic plan. Determine whether the bank’s strategy still aligns with your business needs.
Prepare for this discussion by assembling your business budget and forecasting what your financial needs will be down the road. Have an open, honest conversation. If you have maintained a strong relationship with your banker, he or she will candidly offer advice and direct you as you plan for growth.
CRAIG JOHNSON is president and CEO of Franklin Bank in Southfield, Mich. Reach him at firstname.lastname@example.org or (248) 386-9860.