Navigating Your Company's Access to Credit in Today's Environment
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Companies are thinking about improving, enlarging or upgrading their facilities and services and the attendant questions around how to fund those plans. Business lending is rising as business balance sheets strengthen and profitability returns. There is more competition in the market to attract these strong companies. This makes for a very positive outlook for borrowers and gives an edge to companies who are thoughtful about their capital needs and purposeful about obtaining credit.
Differences in the market that can affect your company’s access to credit
Lending products haven’t changed all that much in the post-recession environment. Traditional products such as real estate financing and re-financing, term loans, equipment leases and lines of credit are all still prevalent and available. The biggest change, perhaps, is in the volume of demand for these products and the availability of alternative financing.
In today’s environment, real estate loans make up the bulk of transactions. Businesses that have survived the volatile economy of the past few years are focusing on expanding or improving facilities by applying for owner-occupied conventional mortgages or, though in fewer numbers, construction loans. Other businesses are requesting investment loans in order to use a portion of the purchased property for their business and the rest for other rental/leasing income. With lower rates, refinancing has once again increased in volume as well, although, in some markets, real estate valuations have not risen all the way back to previous levels, making some properties ineligible for refinancing.
Interestingly, term loans, equipment financing and line of credit requests remain slower. During the downturn, many companies relied heavily on debt to see them through the tough times, and as a result, maxed out their debt limits. Even businesses that are working diligently to pay down debt acquired when profitability and values were higher may still not have reached a point where they could take on new credit under today’s values. In addition, lenders are looking more closely at these traditional loan/line product requests to ensure the funds are used appropriately. Banks today ensure that a business that has long term needs, such as buying a piece of equipment, ends up with a term loan or equipment financing deal instead of the line of credit.
Lending through Small Business Administration (SBA) loan programs has increased in the current environment. For those businesses that may not qualify for a traditional lending product, SBA products offer competitive rates, typically at higher loan to value (LTV) ratios, longer terms and the ability to use loan proceeds for multiple purposes. Covering the spectrum from real estate to equipment to term loans, even lines of credit, SBA lending can be a valuable options for businesses looking to reduce the amount of cash necessary upfront, or those that want to extend the terms of credit in order to budget payments.
How can you position your company to access credit markets?
“The three top financial indicators banks will look at when determining whether to give your business credit are 1) your balance sheet, 2) your expense management skills that support your ability to maintain profitability, and 3) your credit history, both business and personal,” says Sara DuChene, Wholesale Lending Services Geography Relationship Manager for SunTrust Bank.
“Making sure your business has good liquidity, a positive net worth and that you are paying attention to your operating expenses, making adjustments to maintain your profit margins when appropriate, go a long way towards helping you access credit. Lenders today want to ensure your business is on sure footing before extending credit,” Ms. DuChene emphasizes. She also cautions business owners not to overlook the importance of their credit history. “Of course, a business that has timely trade and service accounts payments is more likely to be approved for credit. However, an owner’s personal credit also has an impact on lending decisions because the owner is such an integral part of the business operations. Lenders want to know that personal credit and financial history will not adversely affect the business.”
Talk to your banker about your credit needs, and be prepared to have an open and honest discussion about your balance sheet, operating philosophy and credit history. Also remember to fully explain the reason for the credit request, which will put you in a better position to obtain the credit product that best suits your needs.
This content is general in nature and does not constitute legal, tax, accounting, financial or investment advice. You are encouraged to consult with competent legal, tax, accounting, financial or investment professionals based on your specific circumstances. We do not make any warranties as to accuracy or completeness of this information, do not endorse any third-party companies, products, or services described here, and take no liability for your use of this information.
Once small business owners have secured start-up funding and composed a business plan, the next step is building a client base. Getting the first client is critically important, because it proves out the business model and presents growth opportunity.