Resolve to grow your business in 2010. But if you have not started your company yet, resolve to launch it during the new year.
The reason to plan now is because most pundits are expecting the economy to improve and the credit markets to thaw, albeit slowly. It is reason enough to firm up your banking relationships so that you have the financial power to execute your business plan when the moment is right.
“I look for (lending) clients who also express an interest in a long-term relationship,” says Donly Chase. “If you accept my loan, but take your deposits elsewhere, you haven’t reciprocated.”
Chase was president of Midtown Community Bank, an affiliate of the failed Buckhead Community Bank. The Federal Deposit Insurance Corp. merged it with Macon-based State Bank and Trust Company Dec. 4. He remains with State Bank.
The seasoned Atlanta banker says that in addition to forming a relationship with your banker, underwriting benchmarks are more severe now than they were before the credit crunch.
Therefore, “as a minimum, hard equity of at least 20 percent of the total financing would be needed.”
Accordingly, ask your lender how much of your own cash investment is required. It will vary depending upon the bank, your industry, your related experience and the company’s existing cash flow.
In today’s economic downturn, some lenders rule out certain industries. Thus, Steve Bloom, a venture capitalist and SCORE Atlanta volunteer says, “I suggest to clients that they ask prospective lenders how many loans have they funded in the client’s industry the past year.” That tells you if your industry is out of favor.
Restaurants, hotels and automobile-related businesses are among the industries that some lenders are currently avoiding. Retail start-ups are tough to finance as well.
Angela Smith, formerly with Bank of America in Atlanta, adds, “It is important that borrowers do some upfront homework to identify a lender that has an appetite for the type of industry they are in.”
For fledgling businesses, she says, “If a lender requires at least two years in business, it would be prudent for a borrower to find a lender, be that a bank or an alternative lender, who will be flexible regarding time in business.”
Alternative lenders include the U.S. Small Business Administration’s micro-lenders. Pending legislation will allow them to lend up to $500 million. They often accept start-ups and borderline credits.
Nonbanks such at CIT sometimes make more marginal loans. In fact, it was SBA’s No. 1 lender nationwide until it declared bankruptcy earlier in the year. It recently emerged from receivership and has loan-origination officers in Atlanta. To punctuate its return to prominence, CIT is temporarily waiving its loan fees and plans to lend $500 million in 2010.
Smith says, “Personal credit is even more important than ever.” So while FICO Scores in the 600s may have landed financing in the past, 700 has become the new minimum.
“Borrowers with weaker credit scores will not likely be successful with bank financing at this time,” she says.
Borrowers without a strong track record of profit will be required to pledge hard collateral. Bankers see it as a second way to get repaid.
State Bank’s Chase explains that, “Good collateral could be properly margined real estate or marketable securities.”
“Receivables and inventory, and furniture, fixtures and equipment may also be acceptable collateral though less desirable than good collateral and require higher margins,” he says.
A banker’s worst nightmare is taking back a failed restaurant and trying to resell tablecloths, knives and forks to recoup its outstanding loan balance. For this soft collateral, banks recoup less then 20 percent of the original cost.
Smith, the former Bank of America lender, says, “Good bankers will sit with their customers to understand what’s happening with the company in order to develop a solution that works.” She notes, “That may or may not involve the customer needing to take on additional debt.”
