Lending Landscape
Written by CMG News Contributor, Doug Carleton
The giant (the economy) is stirring. Vaccines are expected to start being administered sometime around the end of the month. And though the public health experts are saying that it will take at least until spring or early summer to have enough people vaccinated to begin to create herd immunity, it’s coming. Businesses looking to grow may need to consider new or increased financing to take advantage of the improving economy and improved consumer outlook. But has your business changed? Are you considering, or have you considered transitioning into a new line of business while keeping your existing? Or have you just made adjustments in your current business without any major changes? Whatever your plans, if you think you may need financing sooner or later to keep growing, you need to know the current lending climate.
Here are some things to be aware of:
Probably the most important thing is keeping lines of communication open with your banker. Now especially, banks may be taking a harder look at some of their credit policies because of the growing threat of defaults.
Banks want to understand your business plan for the future. Business plans are often thought of more in terms of startups, but with what COVID-19 has done to the economy a business plan for an existing business may become more important. If anything has or is going to change, and I mean anything of possible importance, your banker should know about it; specifically, if it is something that is going to affect your revenues and the potential need for future financing. Forecasts are going to become more critical.
The economic damage created in some industries from the pandemic, aside from restaurants and bars, etc., has caused banks to begin re-examining their overall exposure to those industries or markets. If your business is in or impacted by (even as part of a company’s supply chain for example) your bank pulling back from your industry, you need to know because it could affect your expansion plans.
Financial projections are likely to become more important than ever. Banks have always relied strongly on historical financial performance, as indicated by the financial statements when making lending decisions. But because so many businesses may have been negatively affected by Covid, recent financial performance may not be reflective of a company’s prospects and ability to pay back loans. Hence a stronger emphasis on financial projections and business plans.
So know what the banks are thinking, especially your own. You may not need financing now or in the future but think of your bank as a partner. You want them to be there if you need them, and you don’t want to have to bring them up to speed when you most need it. Due to the pandemic, banks are sitting on huge amounts of cash because individuals have been saving so much. They need to get it out, so say you see a sudden surge in demand for your product – like the makers of dry ice as an example, and you want to buy a piece of equipment fast. You want your bank to be ready to write you a check without a lot of hassle. Your banker maybe your best friend.
This blog entry is a slightly edited excerpt from Doug Carleton's 'The Daily Life Of A Small Business Owner' series. Doug was a mentor with SCORE, Startup Virginia, and Lighthouse Labs, and has 25+ years of experience in small business finance including 12 years in SBA lending. To contact Doug directly, please email him at sbaloanspecialist@comcast.net.