Many of the small businesses we serve are having extreme difficulties in their borrowing needs. Banks, facing a bad economy, are doing what’s necessary to hold onto their cash.
One of our clients had a line of credit that was set for renewal a couple of months ago. Because their sales decreased inside the period, their line was cut in half.
Another client in the trucking business was planning on building another terminal for a little over $2M. They’d been working with their bank for close to a year, trying to secure financing.
As the interest rate increased, the project became less and less viable. When the rate offered went over 11%, the owner put the project on the back burner.
Other entrepreneurs, facing a difficult economy, have put their expansion plans on hold as well. Many aren’t even trying to replace obsolete equipment. Fearing a recession, many know that holding onto their available cash is one of the only ways through a recessionary nightmare.
The Federal Reserve Board released a survey of bank lending practices in May. It showed that over half of the respondents had tightened their lending practices to small businesses.
Let me leave you with this.
If you’ve read me for any length of time, you know that I’ve been predicting this for a while. Banks always either slow down or stop lending to small businesses in difficult economies.
Let’s remember that banks need to maintain liquidity ratios between cash on hand and their loan activity to hold onto their bank. This ratio is dictated by the Fed and varies based upon the individual bank’s products and activities.
In bad economies, commercial loans go bad. When this occurs, the loan goes from being an asset on the bank’s balance sheet to a liability.
In order for the bank to maintain its liquidity ratios and still be solvent, it must have more assets than liabilities. This means that they need to hold onto as much cash as possible.
If they don’t maintain those ratios, the FDIC will come in, take the bank from them, and sell it to another bank that can properly fund it and protect the bank’s depositors. When this happens, all upper management will normally lose their jobs.
It’s a vicious cycle that happens every time and is as predictable as the rain.
Many times a bank won’t even seriously look at a loan in the first place and come up with the most ridiculous reasons to say no. If this happens to you, don’t be discouraged.
It’s just a banker doing what they were told, trying to hang onto their job. If the tables were turned and you were in their shoes, you’d probably do the same thing.
That being said, if you need lending in this environment, be smart enough to approach every bank you know and maybe some more as well. Every project isn’t going to appeal to every bank, and many won’t be able to lend in the first place.
If the project is that necessary, then do a full-court press. Someone out there will be willing to help you get it done.
We’re all going to get through this. Let’s get through it together.
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