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Small Business Advice
Credit Crunch
Let me remind you that credit is the lifeblood of business, the lifeblood of prices and jobs.
— Herbert Hoover, Address at Des Moines, Iowa, October 4, 1932
Financial institutions are in such a precarious position. With the economy slowing down and significant losses in their real estate portfolios, so many banks are cutting back credit to both new and established accounts.
With unknown losses from the sub-prime mortgage melt down still to come, plus the financial difficulties of Fannie Mae and Freddie Mac, it is not a good year for banks. With stock values declining by more than 40% and continuing to slide, many national, regional and local banks have taken a beating. The bottom line is that financial institutions are in trouble with both share price and regulators. Losses are going up and share prices are going down.
What is happening? Financial institutions have been incurring losses, and they just cannot afford to be exposed to any further losses. Banks operate on such thin margins, and because losses jeopardize the health of banks, the regulators and banking executives are being very cautious about lending any additional funds. They are even looking at existing loans as well.
We were helping a firm that had been banking at the same bank for over 15 years. This firm went to draw additional funds on their line of credit, and the bank said, “No” — a response that was clearly within their rights, but totally unexpected. This firm had to scramble to find another source of funding to help pay for its season increase in inventory. They are now looking for a new financial institution.
With so much happening in the financial world, each firm must protect its ability to acquire the funds it needs to operate. Firms in need of additional financing will find that there are three alternatives. First, they will get additional funding from their existing financial institution. Second, they will not get the funding they need from their financial institution and will find an alternative source of funding. Finally, they will not get the needed funding and will not be able to find alternative sources of financing.
Obviously, if your existing financial institution is willing to provide additional funding, then you really do not have a problem. However, if your existing financial institutions will not provide the necessary funding, you will have to look elsewhere. I believe that the best place to find replacement funding is local financial institutions. With the exception of Wells Fargo, big national banks are being hit hard and are just not willing to extend themselves. However, local financial institutions typically have much better financials than their national counterparts.
When hunting for local financial institutions, look for those that have the knowledge and experience to make business loans. You might get several turn-downs, but you must persevere. SBA guaranteed loans, although more expensive, are another type of loan that local banks can offer. These loans reduce the bank’s risk.
If you cannot find an alternative source of funding, you will need to consider slowing down your business commensurate with the amount of financing that you have. While this is not pleasant, it may be necessary just to survive. Using a spreadsheet, you can easily model how much sales you can support with a fixed amount of debt. It really is worth going through this process.
Regardless of the level of funding you are able get, it is important to be prepared with a plan in the case that you are unable to get the required financing. Now go out and make sure that you have a plan in place to help you deal with this credit crunch.
You can do this!
Jerry Osteryoung is the Jim Moran Professor of Entrepreneurship in the College of Business at Florida State University. He is also the Director of the Entrepreneurship Program at FSU and Executive Director of the Jim Moran Institute of Global Entrepreneurship. He can be reached by e-mail at jostery@comcast.net or by phone at 850-644-3372.
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