Small businesses have a responsibility to evaluate their lending relationships and to look for signs of lender fatigue.
By: James Cassel
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MIAMI, Florida, January 16, 2012 – Earlier this month, it was reported that Bank of America capped credit lines and restructured repayment plans for an undisclosed number of its small business customers. The move came as a complete surprise to some of these business owners. After all, the capital market is supposedly rebounding, and economic forecasts for 2012 have been encouraging. So, could these small business owners have predicted a falling out with their bank?
Perhaps. Small businesses, more vulnerable and considered more risky by lenders, have a responsibility to evaluate their lending relationships and to look for signs of lender fatigue – signals that their ability to borrow capital may be threatened. I have identified some of the reasons why your bank might consider changing its relationship with you. Some may be the result of what you do, and some may be out of your control. Stay aware of these signs, so you’re not caught by surprise.
Sinking revenue: Smaller businesses have a smaller “capital cushion” to deal with lean times. Even as the economy recovers, your business’ revenues may be lower, and they may not be keeping pace with expectations. Your bank can interpret your revenue challenges as signs of operational issues. In the past, the bank may have been patient, but now they may feel pressured to talk action.
Depreciating collateral: In a crunch, assets – and therefore collateral – may take a hit. Perhaps the value of the property you used as collateral for your business loan has declined in value. If the value of your collateral falls precipitously, your lender may look twice at your credit line, ask for more collateral or pull the plug altogether. Here’s a tip: Think twice before mortgaging an additional property. It may satisfy your lender for a while, but it may hurt you in the long run.
Poor communication: Have you been out of contact after making promises that did not come to fruition? You may lose credibility if communication breaks down between you and your lender during financial troubles. An open line of communication can go a long way.
Lack of customer diversity: If your business works with only a few large customers or clients, especially if your revenue is concentrated with a finite number of sources, your lender may consider this a liability.
Certainly, all small businesses cannot predict their lenders’ moves, but they can be proactive about finding alternative sources of funding. Every year, you should examine your access to capital and your lender’s portfolio.
If you are unhappy with your loan, make a move to change it. Don’t wait until you’re in trouble. Money is available, particularly from local banks, and small businesses are the key to economic stabilization in the United States.
Lenders (and I’m not only referring to big banks) want to put their increased liquidity into potentially profitable small business loans. After all, lenders and banks make their money by lending money.
To make the most of these opportunities, business owners need a diverse approach to sourcing capital. Sometimes, that means calling in the help of an intermediary like an investment banker, and sometimes it’s as simple as knocking on the doors of community banks and credit unions or finding lenders’ business cards in your desk drawer. Regardless, when it’s time for tracking down new money, keep these tips in mind:
1. It’s not just about the interest rate.
When shopping for a loan, compare more than interest rates. Be sure to determine what, if any, prepayment penalties exist, and on what basis your lender can demand full payment. Look at the loan covenants to make sure there is sufficient leeway to prevent a minor glitch from causing a default. Grace periods, notice and right to cure are crucial.
2. Look for a lender who works with small businesses.
When you research lenders, look for ones with a healthy balance of small businesses and large companies in their portfolios. This means they are willing to work with more than just large loans and “safe” options.
3. Take a closer look at the diversity of lenders’ portfolios.
Ask how much exposure the lender has in your industry. It is not uncommon for lenders to reduce their concentration in an industry by asking borrowers to find a new lender.
4. Wait on an independent valuation.
Paying for a valuation – before you have a lender – is a waste of money. Wait to get a bank in the process. If you appraise first, you will end up requiring a second appraisal. Many times, they will examine the collateral internally.
5. Embrace alternative capital sources available to middle-market companies.
Don’t forget about capital sources that can fund operations until you can secure funding from a bank, like factoring (the purchase of receivables), purchase-money financing, and asset-based, non-bank lenders.
While finding a lender always requires some “heavy lifting,” this year you will also face more funding sources in your community and a friendlier lending market.
Also, don’t forget that sourcing capital can require outside professional advisors, such as investment bankers or even fellow middle market business owners. Even if you’re not looking for a loan, you should make a resolution to evaluate where you stand with your bank – and look at those “warning signs” – so that you can make an informed decision.
If your lender calls your loan or sends you a default notice, it is important to contact a lawyer before you sign anything or agree to the terms of a forbearance agreement. Don’t despair if your bank severs ties or restricts your existing line of credit – at least you’re not looking for a loan in a credit crunch. Smaller companies are invigorating our economy, and they need capital to continue. It’s up to you to find out where they are – or enlist a professional to help you do it.