We all know people who see the glass as half-empty and others who see it as half-full.
In today’s small business lending environment, the business owners and financial officers looking for funding seem to fall into the first category, while bankers and other lenders have the latter view. But they agree on one thing: No one is happy.
In recent months, I have heard from more than a few small-business owners who have not been able to find financing for projects that have traditionally been easy to fund. Two local business owners have mentioned that their longstanding lines of credit have been eliminated or reduced in the past couple of weeks.
In one case, a very profitable and still growing business with substantial cash in the bank was told their line of credit would not be renewed after six years of good performance. In another case, a firm that has hit a downturn but has rebuilt its backlog to where it is comfortable about the future received the news that its line was being cut in half. Without that credit, the company might not be able to stay afloat to capitalize on the backlog.
During the same period, I have been visited by commercial lending officers from a number of local and regional banks. Some are new to the job or the area, and some have been around for a while. All of them are telling the story of how much money they have to lend and how much they want to make loans. They are “hungry” to lend money, they tell me.
Something doesn’t jibe.
But maybe the answer is simple. The stronger banks have money to lend, but the criteria for a “good” loan has changed, and the result is fewer borrowers qualify for the loans.
A senior executive of a local community bank commented on this contradiction recently. He said “Oh, we have plenty of money to lend. We just can’t afford to lend it.” He explained that the bank’s loans are rated by both federal regulators and by independent rating organizations. If a loan does not meet certain criteria, it has to be written off against earnings immediately. That gets your attention pretty quickly.
Unfortunately, the ratings criteria have increased significantly since October, and many previously “bankable” loans have lost that designation. In fact, it may be getting worse for smaller businesses as the banks are working their way through their portfolios and finding the time to address smaller loans that had escaped scrutiny until now.
Don’t get the idea that the banks like this situation. As one lender recently said, “It’s no fun being a banker today. I don’t want to make these calls to businesses I’ve worked with for years. I know what it means to them. I just don’t have a choice.”
A local business owner said their banker told them, “I’ve been in this business for 35 years and now I’ve got a 25-year-old guy with no banking experience sitting across the desk telling me what loans I can and can’t make.”
It’s nice to know that the lenders feel the pain of the small-business owner, but sympathy and understanding won’t buy inventory or pay for advertising.
So what can business owners do to avoid a pending problem or solve an existing one?
First, be proactive. If you have funding, look at your loan agreement and understand the terms. Note whether it has restrictions that have not been enforced in the past and be aware that that might change. Know when your loan is up for renewal and start preparing for the conversation that will occur when it is. If you are going to be looking for funding in the future, don’t hesitate to get started. It will take longer than it has in the past.
Second, look for alternatives. In today’s environment, the stronger banks are much more actively looking for loans than the weaker ones. Find out if your current lender is looking for new loans. If they are, you are less likely to get that call reducing your line. If they aren’t, maybe you should be looking to move the line before the call comes. If you are looking for a new loan, cast a wide net.
Third, consider the Small Business Administration. There are a number of changes to the SBA program that might be helpful to you. For instance, they have recently added the America’s Recovery Capital program, loan program that provides up to $35,000 to viable but struggling small businesses to help them make debt payments.
Here’s to a fuller glass for everyone in the future.