Banks are tightening credit standards for business loans, according to the Federal Reserve’s quarterly survey of top loan officers. It is true for large and medium-sized banks (shown in the table above) as well as for small banks. Interest rates on business loans are rising relative to banks’ cost of funds. Bankers also said that the demand for loans is low.
Even if they are not currently borrowing money, small business owners and corporate executives should talk to bankers regularly. The conversation should go beyond the banker positioning the institution as a great partner. Instead, business owners need to understand where their company stands relative to the bank’s credit ratings. Whether the company currently has a loan with the bank or not, whether they qualify for a loan now or in the future will help the company’s planning.
Questions that businesses with loans should ask their bankers
1. Has the bank changed its loan criteria in a way that affects business credit eligibility?
2. What options do we have if we do not meet the new credit requirements? Would more information or warranty help?
3. Do you know of any other financing options that would be suitable for us?
4. If the recession affects our sales and profits, at what point will the bank cut off our credit?
5. Do you have any ideas on how we can strengthen our current creditworthiness so that we are better prepared for a recession?
The last question is very important, but don’t expect a definitive answer. Banks look at different situations and cannot give a one-size-fits-all answer to the question. But a good banker can tell the customer how bad things have to go before the bank is worried. Some companies now have a big cushion, but others are skating on thin ice. And unfortunately, many business owners don’t realize how thin the ice is.
Some business owners are hesitant to mention the potential problem, but this is unreasonable. Every banker knows that recessions hurt companies. Every banker enjoys thinking about the likelihood of a customer defaulting and what measures he or she is likely to resist.
Questions that businesses with no credit should ask their bankers
Businesses that don’t currently lend will use the idea of whether they can become bankable if a good deal comes along. For example, let’s say a competitor needs to sell his business because of a health problem. Or suppose a new opportunity arises that requires a large capital investment. Or imagine that a flood will cause short-term damage to an otherwise healthy business. These situations arise and a wise owner is prepared for them. Here are some good questions for companies that don’t currently borrow money from their banks.
1. If we want a loan today, can the bank finance it? (The request is probably for a speculative loan purpose, such as buying equipment, financing accounts receivable, or acquiring another company.)
2. For what loan purposes does the bank support more?
3. How far is the company from the bank’s credit rating now? If you qualify for credit today, how low can the financing go before the bank closes the line of credit? If you are not creditworthy today, what would you need to improve to qualify for a loan?
4. What changes can the company make to improve the bank’s view of credit-worthiness?
A banker wants to see the company’s cash flow relative to current debt service. Also, recent sales and profit growth trends are important. Liquidity—how quickly a company’s assets can be turned into cash—is also a factor. Collateral is important, usually in the form of inventory, inventory, or real estate. Credit history is also important.
Often the banker cannot give the right answer, but a good loan officer can help the client understand how close the company is to the dividing line. Some banks have automated their credit approval process to the point that the person talking to the customer does not know the bank’s standards. Fortunately, many banks have people who can help business owners understand the key standards the bank holds.
Business lending in a recession
Recessions offer good buying opportunities for companies with good cash flow. Some other businesses are available for purchase, while others offer land and used equipment for sale. If a buyer cancels an order, some new equipment may be available. Getting good credit can help a company take advantage of these opportunities. And talking to bankers early can speed up the process.
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