SEMA News - May 2010
Don’t Take Credit for Granted
This series of SEMA News stories is based on the idea of using reliable and repeatable methods to ensure business success. In coming issues, we will delve into a range of topics aimed at developing Best Practices through knowledge, motivation and skills.
Money has been tight for more than two years. Small businesses were especially hard hit by the recession that began late in 2007, with some estimates indicating that companies suffered sales losses ranging from 10% to 40% or more. The resulting constriction resulted in layoffs, cutbacks, inventory reductions and consolidations that made a bad situation even worse for businesses that were on the bubble between solvency and bankruptcy. Some did not survive.
There are mixed messages about where the economy now stands—including an increasing Gross Domestic Product and a rising stock market offset by residual high unemployment levels—but most experts feel that a recovery has begun. Now may be the time to set the financial wheels in motion for those businesses that are prepared to invest in growth. However, acquiring capital is not a quick and easy proposition, even for a company that boasts a solid credit history. Advanced Clutch Technology Inc. (ACT) is a case in point.
ACT had been dealing with the same regional bank for eight years when the recession began. The company had renewed its line of credit annually and had also financed other loans through that same institution. The bank—a regional lender—had occasionally expressed reservations about ACT’s inventory levels, not fully understanding the specialty-equipment industry, but had always renewed the credit line. Until the end of 2008.
“The bank didn’t initially say that it was declining to finance,” said Tracie Nuñez, ACT’s chief executive officer. “But four months after we began the renewal process, the bank’s officials came back and said they weren’t comfortable dealing with our type of business—a manufacturer in the automotive market.”
Nuñez began a search for new financing. She and her team went through discussions with five different institutions—each of which took hours, days and weeks before declining financing. But she took lessons from every encounter.
“We learned that it’s very difficult to get a loan after you developed the need,” she said. “You should complete your due diligence well in advance of seeking a loan. It’s hard to compile all of the information you need when you’re suddenly under the gun.”
Michael Valenti, vice president and manager of Manufacturers Bank in Los Angeles, where ACT finally found a receptive lender, said that going into a loan process with all of the proper and up-to-date information at hand not only speeds what can be a lengthy process, but also gives the loan officer a positive initial view of the client.
“Come in prepared so that you can explain where you’ve been and where you want to go,” Valenti said. “Put a package together that includes three years of business tax returns, three years of personal tax returns on all owners of a corporation, a current balance sheet and an income statement that is no older than 90 days. Also include your current receivables and payable aging and one or two pages explaining the reason you need to borrow the money, what sales look like going forward and how the money will be paid back.”
Six Steps to Prepare for the Loan Process
“Clearly articulate the purpose of the loan request, understanding that lenders are in the business to provide capital for good business reasons,” he counseled. “These reasons often include financing to support sales growth, equipment purchases to expand capacity or improve efficiency, to purchase a building or to buy a business. Most lenders are not going to be interested in financing operating losses, delinquent receivables or other needs caused by negative trends.”
Goodwin also suggested inviting the lender to meet with you at your place of business as a preliminary step, even before the paperwork begins. A face-to-face, on-premises meeting allows you to introduce the banker to your business and provide a tour of your operations.
“You can effectively interview the banker during this time,” he said. “You can ask questions about the process by which the bank makes decisions and agree on the next steps. The goal is to enable the banker to leave the meeting with a good understanding of what the company is all about and a timeframe for follow-up. Even if you must meet the loan officer at the bank, use that initial time to interview the banker so that you clearly understand what the approval process entails and if the bank provides the services you are seeking to companies within your industry.”
Goodwin said that completion of a loan application may or may not be necessary, depending on the size of the loan request and the financial institution. Although application forms vary from bank to bank, the information that is typically requested is often the same. When you request an application, review with the banker the additional information that will be requested to be submitted so that all the information the bank deems necessary to make a decision can be submitted at one time.
Now may be the time to set the financial wheels in motion for businesses that are prepared to invest in growth.
Nuñez also said that several of the banks she dealt with seemed to be dragging their feet or asking for information on a piecemeal basis, leading to frustration and confusion on her part. That scenario may be an indication that the lender and borrower are simply not well matched, Goodwin said.
Additionally, many banks have become conservative lenders in response to a higher level of scrutiny, perceived or real, by bank regulators and audit committees. Companies that cater to economic sectors hard hit during the recession, such as in the housing and auto industries, may be asked to provide extra assurances that their business models are compelling.
“Banks are in the risk-management business and understand how to assess those risks,” he said. “Some lenders are in the business to take very high risks, and for that they demand high returns. Lenders may provide financing despite higher risk profiles based upon strong collateral or guarantor support. If you find that your bank is continuing to ask for additional information that does not appear to be material to the decision or that has been previously submitted, you may conclude that you have the wrong bank or banker. Banks are interested in understanding and assessing the character of the borrower, the capacity of the borrower to repay the debt, and the collateral that will be pledged to support the loan in the event that the cash flow of the business turns out to be insufficient to repay the loan. That’s why you should ask about and understand the decision-making process of the bank and the expected timing of a decision.”
Goodwin also pointed out that financial institutions are not the only sources that a company might consider in the search for capital. Loans from friends and family are common in the early stages of a company’s development or in times of difficulty. Equity from other investors is also a possibility once a company has developed a proven product, made a place for itself in a market and established a track record. Often-overlooked sources of financing can also include customers and vendors, Goodwin said, since such business partners may understand the business well and may even agree to more favorable trade terms or loans.
If you do decide on a lending institution, proper paperwork is vital. Valenti said that Manufacturer’s Bank provides a loan application checklist, as do most financial institutions. In addition, the Small Business Administration’s website offers a full range of forms as well as general and more detailed information about securing an SBA-guaranteed loan. Compiling such information for and about your company can provide additional benefits.
“We’ve used our executive profiles in our marketing pieces and discussions with new clients,” Nuñez said, “and we’ve used them when we’ve had opportunities for coverage by magazines. But time is of the essence. When you decide to seek a loan, you have to put the biggest possible priority on it. The quicker you can get the bank your information, the more they will stay connected with you. If you’re quick and responsive about providing documents, the bank will perceive that as the way the whole business is run.”