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Crisis Financing – Finding Capital Resources During the Great Recession
By: Ron Box
Are you struggling with diminished cash flow and a limited (or reduced) working capital line from your bank? Is your company in need of capital improvements or repairs and, despite a record low federal funds rate, you are unable to obtain the financing to begin projects or maintain a comfortable cushion for payroll? Why is bank financing so difficult to obtain for so many businesses and what can you do about it?
For those responsible for the financial issues of an organization have heard for a very long time that bank programs such as TARP were intended to provide our banks with the means to facilitate lending to deserving businesses and facilitate a recovery from the “great recession”. Yet on January 18, 2010, CNNMoney reported that the “The 22 banks that got the most help from the Treasury's bailout programs have cut their small business loan balances $12.5 billion since April, when the Treasury began requiring them to file monthly reports on the tally. The banks' total lending has fallen 4.6% in that seven-month period, to $256.8 billion.” See http://money.cnn.com/2010/01/18/smallbusiness/
small_business_lending_drop/index.htm
The normal process of extending credit has become much more difficult. Clearly, there are many issues involved in commercial lending that are beyond your control as a finance professional. So, what steps can you take to maximize the likelihood of securing the bank financing required for your business?
1. Go back to the fundamentals of the business. Make a list of the strengths and advantages that your business commands. It is sometimes difficult to stop and consider the positive elements of the organization when constantly faced with crisis. Most businesses, however, have some form of asset that can be leveraged. These assets can take the form of an exceptional product, owners or employees with unique technical skills, a superior manufacturing process, or any other advantages that can be unique to the business. This analysis of business strengths will help you to determine your strategic advantage in the marketplace.
2. Develop a written business plan specifically to take advantage of your businesses strengths. It may be necessary to focus strictly on the core business, your primary strategic interests. What resources can be allocated to support the core business? Determine if you have adequate cash flow to sustain those basic elements of the business. If not, what existing costs are not required to sustain the core of the business? In essence, what obstacles exist in reaching a point of equilibrium, a self-sustaining core business? Take an inventory of the resources that you can marshal to support the strengths of your business. Determine any assets not pledged as collateral on existing notes and assign an honest fair market value. Consider refinancing of debt to create additional cash flow. Create a clear and honest one and two year business plan with realistic projections.
3. Proactively take the business plan to your banker. Communicate your plan clearly and honestly. Anticipate questions by trying to think like a banker. Why is this deal good for the bank? Be prepared to answer detailed questions. All banks do not share the same lending philosophy, so be prepared to take your plan to other banks. Do not be discouraged by the decision of one bank. While it is true that all banks are subject to regulatory review, and lending decisions will be scrutinized by an increasingly risk adverse set of regulators, it is still possible find financing for a solid business model in a stable industry.
Commercial bankers are now faced with an environment requiring that lending decisions pass a much higher level of scrutiny than in recent years. Expect that lending risk and profitability will be factored in to any decision, and discuss with your banker any ways that you can increase the profitability of the relationship. Moving deposit relationships, 401(k) trust fees, brokerage fees, etc. can increase the overall profitability of the relationship and mitigate a certain amount of risk.
These are very difficult times for many organizations and it is necessary to take every honest and ethical step to finance the core needs of the business. Develop an honest business plan and communicate it clearly with your banker. Shop the plan if necessary. As the economy improves, the lending process should become easier to manage and you will have successfully guided your business through the crisis of the Great Recession.