Euro Crisis Drying Up Small Business Credit? Give Your Business Every Advantage in Applying for Credit.

Big banks are back in the spotlight. The Fed's new "stress testing" focus includes evaluating bank exposure to Euro debt. As banks limp along, getting a small business loan is increasingly difficult. However, small banks approved 44% of small business loans in 2011, compared to big bank's abysmal rate of only 10%! Read the article.

You should have every advantage available when applying for and negotiating favorable loan terms for your small business. Knowing what your loan officer is thinking, allows you to gain negotiating power.

Time is money. The last thing your loan officer wants to do is go 50% of the way to loan closing and then fail to close the loan. If you have a credible loan request it goes to the top of the priority list. Start with an in-depth conversation about your business.

Credibility Stems From:

A) Being organized - Your loan documents can't be prepared without a copy of your organizational documents (articles) and financial statements - have copies readily available.

B) Understand the parties involved - Do you have other creditors? Do you plan to obtain additional financing from other creditors at a future date? What collateral is available? Are there third parties who will need to sign pledge agreements or authorize the financing? Banks don't ever want to end up in court and they don't like to be surprised. And usually when they are surprised they have an out. It's buried in those pages of documents. I know what you're thinking...But I have an attorney to review documents! (read on).

C) There are two types of banks: those with standard documents (no negotiating of loan documents allowed) and those utilizing the services of outside counsel (this will cost you). You should know which type of documents your banker is proposing. Typically, standard documents will save time and money and will work for most financing transactions unless you have unique business circumstances.

Once you have established credibility with your banker, the balance of power shifts to you. Your banker is trying to get your loan request approved with the credit authority. Ideally, minimal new questions turn up at this point. Lots of new questions signal you and your banker haven't covered all the bases, which means you don't have an empowered advocate inside the bank. As your credit request moves forward loan terms will become the primary discussion point.

Obtain Favorable Loan Terms:

A) Get it in writing. When your banker puts an interest rate or loan terms in writing it becomes a commitment. Written offers to lend are not subject to the whims of internal bank staff. A written offer usually = legally binding offer.

B) Consider loan covenants and loan terms and ask how the bank arrived at these conclusions. Are they realistic for your business? The last thing you need is a default letter 12 months down the road as a result of unreasonable expectations.

C) Offer information and seek to understand how the bank's risk position can be improved. Can you offer guarantor support? Are you bringing deposit accounts to the bank? Pledging liquid assets and providing a control agreement makes any loan look better to the bank.

Give yourself every advantage. Know your business's financial strengths. If there are weaknesses, anticipate the bank's potential concern and try to offer risk mitigating factors. And know when to get in writing. The closing table is long way off, but at a certain point your prospective banker should issue a written commitment that you can rely on for business decision making. Like any other business transaction, a certain amount of transparency and ability to recognize the counter-party's perspective paves the way to obtaining bank financing.

Getting an approval for new loan funds will not be easier in 2012. But at least you now know what your banker is thinking.

Thawing Credit Markets Begin Drowing Survivors...

A quick note before I launch into the nuances of accessing business credit in the current climate... According to AP, as of July 15 Denny Hecker has obtained a $100,000 line of credit for a new business venture. Has it even been one month since he declared personal bankruptcy? Ok, so he's got connections, (some things never change), but for the rest of the business community out there, credit is a problem.

Recently, there is a general sense of renewed optimism for economic growth and an upturn in stocks.

POLLYANNA, DO NOT BE FOOLED!

Yes, the US economy has survived, big surprise. Dumping trillions of dollars (proceeds of new goverment debt) on any financial problem is a sure fire short term solution.

Small business (under $25 million annual sales) and lower middle market ($25-$50 million annual sales) financing is a staple of our economy. Availability of credit to these markets is crucial to a sustainable recovery.

Here are a few (abbreviated) examples of what thousands of business owners with credit lines are currently hearing from their banks:

1) "The bank would prefer to lend 40% against your inventory instead of 80%, effective tomorrow".

2) "The value of your house is cut in half since we last talked, we need to cut your credit line back by $500,000".

3) "Would you mind telling your customers to send their payments to the bank directly?"

Business loans are primarily made by "small" community banks and specialized departments of large banks. In 2009, how do government actions continue to impact these two sets of competitors?

Traditionally, small banks have followed the famed "3,6,3" rule defined as: Take deposits and pay 3% interest, lend the money out at 6% and be on the golf course by 3 pm. To be fair, lets remove the illusions about these seemingly soft, denizens of the dollar. The individuals running these small banks (99% are privately owned) have their own capital at risk, understand the value of a dollar and usually know more about what is happening in town than the 911 dispatcher, the local attorney and the barber all put together. The local bank has the ability to judge the prospective borrower based on character as well as financial statements. Do I sound like I am describing a prehistoric business model in the evolution of economics? The answer may be yes...But having the best information still works! These bankers have their money where the mouth is. They recognize a tough business environment...And just try getting a loan today...

Contrast to the Wells Fargos and US Banks of the world. When you walk into one of these institutions for a loan you may think you're at Macdonalds. You get in line, someone takes your order for a loan, another nice person inputs your info into a gigantic computer system which eventually spits back a result. From your view point you may not see the chain of events leading up to loan funding or what happens after. Behind the scene, the government is providing loan guarantees so these loans can be packaged and sold for a premium. In some cases, if these bigger banks make an excessive abundance of bad loans the government simply provides direct capital!

So don't be fooled. Bankers that have their own money on the line are skittish. These "government enabled" big banks will continue their legacy of making bad loans at the taxpayers expense. It's just another handout that is unsustainable in the long run.

P.S. The above only addresses loans to operating companies (think employers). None of the potentially negative* statements above address the continuation of the real estate plague and associated financial debacle. That is a topic for another day.

*Subjective terms in this context, such as "negative" or "postive" must consider your reference point of reality. If you believe reality is that a nuclear blip will evaporate the planet within minutes, the fact that I am discussing credit markets is acutually an optimistic view point. :)