How to Secure Your Line of Credit
By Paul Diamond, Vistage International
Turmoil in the financial markets is wreaking havoc on many areas of the economy, including money markets previously regarded as safe havens. While Wall Street waits to see how the government's bailout plan plays out, many banks have already tightened their lending policies.
"Banks are going to be restricted in how they lend in the short term," says Vistage speaker and turnaround expert Marv Davis, author of Take No Prisoners: A No-Holds-Barred Approach to Corporate Excellence. "Banks will be examining under-performing loans and potentially troubled sectors such as restaurants or real-estate-associated businesses. Businesses will find that loans are more difficult to secure as banks try to lower their risk exposure. For many companies, borrowing will be difficult for some months to come and interest rates will be high even though the Fed discount rate is low."
Vistage View tackles four questions that many Vistage members are asking about how the current economic situation will affect banking.
Will I be able to borrow money when I need it?
"We're already seeing bank lending dry up to small businesses, at least temporarily," says Vistage member David Green, President and CEO of Contra Costa Federal Credit Union. Green has reservations that the government's plan will solve the economy's underlying problems. If banks are able to sell their bad assets to the government, Green predicts they will use the money from those sales to lend to businesses but at "higher interest rates with more personal guarantees." In other words, "business owners will have to collateralize those loans with personal assets. This is not a good way to promote small business, in my opinion."
What should I do to secure my business line of credit?
Green advises small business owners to see their banker soon, before their lines of credit are reduced or closed. "Business owners should have a business plan, financial statements, and a budget on hand, so that the banker has an idea which direction the business is going. It's important for business owners to know their business and their industry better than the banker. If the banker thinks he or she knows better (even if they're wrong), then the bank is unlikely to maintain a line of credit or offer a loan."
Banks will be particularly interested in seeing cash flow statements, managerial experience descriptions, and financial projections that take into account the future costs of operating the business.
What should I ask banks when calling about a loan?
In a recent CCNMoney article How to Land a Bank Loan, Bill Bartmann, founder of Tulsa-based BillionaireU offered a script that businesses can use when cold-calling banks to inquire about loans. He claims banks first determine lending by three primary items, the size of the loan, the industry of the lender, and the location of the lender. He suggests using this script:
"Hi, my name is John Doe and I am interested in borrowing $ (amount) for (type of business), located in (geographic area). Would your institution have an interest in visiting with me about that?"
Where can I turn if their bank closes its line of credit?
"Credit unions love lending to local businesses," says Green. "In the last 10 years, credit unions have opened their doors to anyone who lives, works, or worships in a defined geographical area, so it's likely most business owners would qualify to join multiple credit unions. Generally, credit unions have better rates and terms and lower fees than banks. If the business owner gets turned down at one institution, they should go down the street and check out the next institution, and keep trying until a bank/credit union is willing to offer them credit. Bringing their personal business to an institution may also help in securing business credit."
A recent CNNMoney article 8 Places to Get Financing suggests other avenues for business borrowers such as grants, credit cards, angel investors, venture capitalists, factoring (selling a business's receivables), friends and family, and microlenders. The article details the pros and cons of each source of funds.
What kind of action plan should my company put in place now to insure I have operating capital?
Marv Davis offers these steps for companies to keep their financials on track: Use rational thought and planning, not knee-jerk reactions.
Prepare a weekly cash-flow plan for at least three months (preferably six months) to see what your cash flow needs will be and how you will cover them.
Reassure your banker of your company's financial viability. Ask what you can expect of the bank in the coming months.
Start courting other banks to insure that you are not left high and dry if you experience a problem with your primary lender.
Examine your accounts receivable for potential problem customers and begin aggressive collection and work-out activities.
Look at exporting as a market strategy. The dollar is likely to be weak for a while and U.S. goods and services will be a bargain abroad.
Trim out excesses in your operations and hold on to internal cash.
Get external help from turnaround experts who can help you develop a survival plan.
Be optimistic-the economic crisis will pass in time. The key is to anticipate carefully and take intelligent action steps.
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