Wednesday, August 08, 2007

Tips for Weathering a Credit Crunch

Just a month ago, I noted that small businesses were not worried about their ability to obtain business loans. The economy was growing and the availability of business loans was plentiful and priced at attractive rates.

Frankly, I was surprised at this sentiment expressed by small business owners, but that was before the subprime mortgage meltdown.

Now, according to The Wall Street Journal in "How Firms Can Weather a Credit Crunch", small business may soon be looking at a credit crunch.

Some businesses are falling behind on loan payments and default rates are expected to accelerate.

Big surprise.

For the last 36 months, some banks have been falling all over one another to offer the lowest rates and the most flexible terms to even marginally creditworthy business borrowers. It's easy for a small business to make its loan payments when the prime rate is at 4.25%. A completely different story now that the prime rate is at 8.25%.

Both the bank business development officers and the bank workout guys tell me that change is in the air. Expect slightly tougher credit standards with a lot more emphasis on cash flow and less on how much equity the borrower has in their home or their business real estate.

So what's a small business to do? Tighten up on expenses, pay closer attention to collecting accounts receivable, know the value of your collateral and make sure you've got timely and accurate financial reports.

Also, don't forget that all lenders aren't the same. They have different criteria and interest rate requirements. Some of them actually value relationships and may be able to bend a little bit if you get into trouble.

Plus, when one bank says no, doesn't mean another bank won't say yes. If all the banks say no, there's an entire universe of asset based lenders ready to provide your small business with a loan secured by purchase orders, accounts receivable, equipment and real estate. Availability may not be an issue if a borrower can live with the higher cost of capital.

Need help finding the right lender or telling your story the right way? Read "Matchmaking for Business Loans" and give me a call!

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