2010 is fast approaching and for many small businesses it is a welcome sight. 2009 has been wrought with disaster for Main Street businesses; from the financial crisis making access to capital nearly non-existence to the recession that has significantly curbed consumer spending - both of which has detrimentally hurt the cash flow of nearly every business (small and large) on this planet.
As we look to 2010, wiping our brow, hopefully we look forward with optimism about the possibilities of the New Year and what it can bring.
But, we should also look back in a sense to see what we can learn from the experiences we have just survived - experiences that were not accounted for in 2008 - but experiences that we met head on and overcame.
One of the most compelling and controversial issues in the coming year will again be access to capital. Prior to the financial crisis in late 2008 and 2009, money flow pretty freely. Banks could originate loans, collected fees and then sell those loans to quasi-government groups or directly to investors, collecting more fees. The end result was cheap income in the form of all those fees and no in-house risks as the loans were sold off to someone else. Thus, bank lending policies were either forgotten about or customized to fit business borrowers (qualified or otherwise). Who needed a lending policy as once the loan was approved and fees collected, the underlying risks were passed on.
Those days seem far gone now. In 2009, the massive bailouts and proposed additional banking regulations have made banks trend in the opposite direction - essentially making a 180 degree turn. Now, money is not flowing freely, it is not flowing at all.
Here is why. Our government and other leaders are pleading with these banks to open their vaults again while at the same time forcing new regulations upon these institutions. These new regulations, designed to protect borrowers, can hurt these banks if they (banks) increase their own risks and potentially put undue burdens of the U.S. economy (which will happen with increased lending to non-qualified borrowers - just as we saw in 2008 and 2009). Under these regulations, the government can come in and take over the bank(s).
Further, banks are stating that they want to lend to businesses but are just not seeing credit-worthy borrowers - which is in part understandable. With high unemployment, high debt levels and lower income as a nation, personal credit scores are bound to decline. And, as banks rely on both credit scores (the willingness of borrowers to repay obligations) and cash flow or income (the ability to repay these debt obligations) to make decisions, it is no wonder that many borrowers are deemed not credit-worthy.
But, if you are a potential borrower - individuals or business - there are some lessons that we can learn moving forward into the New Year.
The rules have changed. Banks are now dusting off their lending policies and sticking to them word for word. That means higher credit standards as a way to lower their individual risks as they just can no longer pass those risks on to our government or private investors.
For business owners seeking capital, this means that, as borrowers, it is no longer sufficient to just go to your bank and apply for a loan or credit hoping that the bank will tweak its policies to fit the business's need. The upcoming 2010 year will require borrowers to better understand, not only the types of loans or capital that may be available to them, but to understand the rules in which to obtain this credit.
Once these new rules are understood, the business owner will be tasked to execute their business to fit these new rules - meaning that the business must tweak itself and not rely on the banks to fit the business into their requirements.
Understanding business credit in 2010 will come in two forms. First, the business borrower must understand what is available given the strength or stage of their business. Most financial institutions will not fund start-up businesses. But, just because your business is considered a start-up business doesn't mean that business credit is out of your grasp. There are many other financing products for new businesses from invoice or order factoring to business cash advances that can provide needed capital to new, growing companies. But, it starts with understanding which products are right for which business depending on stage, need or assets.
The second part of understand stems from understanding the rules. Once your business understands which bank or loan products is right for it, then your business must understand the rules of obtaining and qualifying for those products. Banks want to see both the ability to repay (positive cash flow) married with the willingness to repay (meaning high credit scores) not to mention collateral and personal guarantees. Accounts receivable factors want to see strength and collectability of invoices while business cash advancers want to see transaction inflow. Even SBA loans require banks to underwrite them - requiring even more understanding of both the bank's rules and the SBA's rules.
The bottom line is that even though your business, from your prospective, may fit a certain product or you may just simply want a certain product - if you don't understand what is available and what is best for your business and what it takes to qualify, you will be left in the dark to ultimately fail.
But, just understanding will not be enough in 2010. The business must also execute its operations to fit this new understanding and these new rules. For example, banks want to see positive cash flow at time of application (not some point in the future). But, just having positive cash flow is not enough (based on their rules). Your business must be operating profitably for two to three years or more (one month or one quarter could just be a fluke). Further, banks like to see cushions on income. Meaning that just being able to make the monthly payment is not enough you have to be able to show that your business can earn the debt service plus (the plus depends on the bank - you will know this amount if you understand your bank's requirements - thus the understanding section above). Some banks will want to see a debt service ability of 1.5X or more. The reason is that the banks want to ensure that should your business slip or the economy tank again, your business could still meet the minimum payment. Banks just simply want to be repaid!
Moreover, as stated above, factors want to see strong invoices or a steady inflow of sales or receipts.
Now, if your business does not meet these new standards, the business owners must then execute the business (tweak the business) if it wants to access these funds. No longer will the banks and other lenders bend over for your business, your business has to bend over for the banks.
This could mean for example, if seeking to factor accounts receivables, that your customers are very strong customers (both able and willingness to pay the invoice by the terms agreed). If you have weak customers that you are holding invoices on, you will not be able to factor those receivables. Thus, if you are working with weak customers - your tweak may be to move away from those weak customers and go after other stronger customers. Or as another example, if seeking a business cash advance, you understand that these advancers will only work with companies that have $5,000 per month in credit card receipts and your business does not meet this threshold. Then you must tweak your business to fulfill this requirement. This could mean making it more beneficial or easier for your customers to pay on credit cards than in cash or by check.
Lastly, the goal of most businesses is to access and obtain bank financing products. But, if your business does not qualify (based on your research and understanding of bank products) then you have to tweak your business to meet those qualifications. Example, your business is not profitable and will not be profitable until you receive some capital for growth. But, not qualifying for the bank credit means no growth capital. The dilemma - you need profits to get capital but can't realize profits until you get the capital.
To tweak this business, you might find some other capital source that is available to your business as it stands. Then, use that capital to grow your business to the point that it qualifies for the bank products. Might not be the way you wanted and might even be more expensive but these tweaks gets you to your goal.
And, of course, credit histories. All lenders want to see high credit scores. If your credit score is below the minimum don't try to manipulate the bank or justify your poor score (someone else fault). Just work to fix it - it is really your only chance. The first thing most lenders do is pull credit. If your credit is poor, they will not waste their time with you - no matter how strong your other attributes are!
2010 will not just simply make accessing capital for businesses any easier just because it is a new year. But, through better understanding of the types of financing products and how to qualify for those products as well as the willingness to execute your business to achieve or fit those products will open the capital vaults for you. If you need capital in 2010, you will have to work for it - both in understanding and execution.
About the Author:
Joseph Lizio holds a MBA in Finance and Entrepreneurship, is the founder of Business Money Today, has a strong commercial lending background and is regarded as an expert in business and finance.