Credit still tight on Main Street – NY Fed report

Credit still tight on Main Street – NY Fed report

By Catherine Clifford, staff reporter ( October 18, 2010: 5:42 PM ET

 “NEW YORK ( — Small businesses are not getting access to the credit they need, and as a result, they are struggling to generate the jobs needed to lead the nation toward recovery.

“Small firms employ nearly half of all Americans, account for about 60 percent of gross job creation, and historically have created more jobs than larger firms at the start of economic recoveries,” according to a report from the Federal Reserve Bank of New York released Monday. “Yet recent contractions in business borrowing may be limiting the capacity of small businesses to play this critical role.”

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The above from CNN Money is not news to many small businesses on Main Street. The article goes on to state that according to the New York central bank some $40 Billion in loans have disappeared since 2008. Small businesses still need bank loans and many more have quit seeking loans because they are discouraged. Further the article indicated that this is in part because many businesses are not credit worthy.

This is not the whole story. A Community Banker I know has shown me a 2 page list of new regulations since the end of 2008 comprised of over 50 new regulations. And this is before the new banking regulations were passed last summer! This increases the cost of banking and significantly changes the bank’s ability to lend by changing the lending rules. And while many companies do have weaker balance sheets, a bigger issue is a business owner’s lack of preparation for meeting with the bank and their ability to understand what the bank really wants and needs to know.

The article further states that “More than three-quarters of small businesses that applied for a loan during the first half of 2010 received only “some” or “none” of the credit they desired.”

Here are several items to help improve your chances of landing the loan you need.

1)    What is the status of your existing debt? Do you have a line of credit that you have maxed out and cannot pay down? Banks will look to term out part or all of this debt over several years.

2)    Do you really understand how much debt you need? Good projections can help make sure your request is supportable and realistic!

3)    Do you have positive working capital? (Current assets minus current liabilities)

4)    How much money do you have tied up in accounts receivable and inventory? Day Sales in receivables and inventory turnover calculations will indicate how much cash you can free up without using any bank debt.

5)    Understand your balance sheet ratios. What is your current ratio (current assets divided by current liabilities) a key liquidity measure, and debt to equity ratio (debt divided by equity) a key leverage ratio.

6)    What are your Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA). This is considered one measure of cash flow.

7)    Are you willing to sign a personal guarantee for the debt? If you don’t believe in your company, why should the bank? They want to be your lender, not your partner.

Don’t buy into the press that you cannot get loans in this market. Yes you will need a good story, yes you will need to be cash flow positive and yes you will need to prepare.

The CNN Money article goes on to state the following:

“Meanwhile, Federal Reserve Chairman Ben Bernanke said in a speech on Friday that there have been some “positive signs” in the credit conditions for small businesses. “In particular, banks are no longer tightening lending standards and terms and are reportedly becoming more proactive in seeking out creditworthy borrowers,” he said. “

The financial markets are loosening ever so slowly, but as a part-time CFO I work with clients to help them properly finance their businesses. Knowledge of multiple lenders and their specific lending criteria and appetite for specific type of loans and industries can significantly improve your chance for success. That knowledge alone can be the difference between success and failure in getting your loan package in place. Contact me today to see if I can help provide the capital you need to grow your business. 

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