Liquidity and bank lending

 We are just emerging from a recession. Most businesses during the last three years barely kept their head above water. Most businesses have been reducing there debt load, to reduce the interest expense and to try and get away from the high interest credit cards. The liquidity of many a small business has taken a hit just getting through the recession. It is times like this when they need their banker the most.

The banks have returned to liquidity as their primary lending criteria. Yes you still need a high credit score, (See the squeeze article). You will need a minimum of two years in business and you will need sufficient collateral. Keep in mind that banks value collateral based on the liquidation value, not your value or your cost basis. Banks typical discount real estate assets by 25% or more, and other collateral, such as inventory by as much as 70%.

The under witting criteria for bank loans and other risk assessments, such as credit card processing, has tightened considerably the last two years. Banks are looking for liquidity of about 10% of annual sales volume or it's equivalent to be on hand, in cash or other liquid assets such as stocks, CDs, etc. We are back to the good old days of, if you don't need the loan you can get it. You will need two years of profitability. The bank will want to see two years business and personal tax returns.

Criteria that will help your loan request only if you have the required liquidity and collateral are. Length of time in business, owners and mangers experience, government guarantee, type of business you are in, payment history, total indebtedness, profitability, profit margins, and giving the bank all your business.

Commercial bank loans are based on a rate index plus a percent, it might be the prime rate plus 2% or the London interchange bank rate. Commercial loan rates are adjustable, for the next two years interest rates will be low, but soon or later interest rates will go up as the fed tries to control the US economy. You will also pay a loan origination fee and other fees, such as appraisal fees. Your bank loan will be renewable, often yearly, seldom longer then five years (real estate loans). The bank will call the loan and demand payment at the most inopportune time, count on it, and plan on it happening. All your best laid plans, all your good intentions will not change that. The bank will protect themselves. The best you can hope for if they call your loan is to covert to a payout loan, usually twelve to twenty four months.

From the bankers point of view; The tight lending polices makes perfect sense. After all the banker is not a risk taker, the bank's examiners expect it. They don't have time to justify their decision on every loan to the banks board or the bank's examiners, their boss isn't paying them to take chances, they have a duty to the stock holders, etc. If things go south and the bank gets concerned about your business viability they will act quickly to protect their interest and collect the loan balance. They will not sit idly by while you burn through the assets.

From the businessman's point of view: Banks lending criteria are to tight given the reality of the past three years. Banks are not paying anything for cash on deposit. They even charge you for depositing it. Banks are increasing fees and making the banking relationship a no win situation. Banks should put more weight on collateral and the businessman's experience and less on liquidity during a down turn in the economy when profits are squeezed. Banks only lend money when you don't need it. Money is suppose to be put to work not sitting idle.

What to do: there is no loyalty from your bank, it is gone and has been for a decade. Shop for banking service just like you do for any other product. Go wherever the best deal is that will save your company money. I shopped around and will save about $6,000 over the next twelve months in various fee's charged by my bank and my credit card processor.

If you have other sources of low cost loans use them. You can borrow against insurance polices, annuities, 401k's, and wholly owned real estate as well as from relatives. The bank is not always the best source. If you are going to borrow from a bank consider the smaller local banks, they are better then the larger national banks. Credit unions are a good local source for small business loans.

Do not give all your business to one bank. It can cost you dearly. Do not give the banker any more information then they ask for. If the bank know everything you own they will try and tie up all your collateral on one loan. If the banker has access to all your information you have little bargaining power. They will not try and earn your business if they know they have it all. They will use all the information at their disposal against you if the need arises. Do not tell the bank when things get a little rough in your business, the old adage from your banker “we want to know if things are bad so we can help you” is a lie.

If you can get the money there are lots of opportunities out there. Bargains on business real estate and various business assets.