Access to Credit

Access to credit has been a challenge for many businesses, though others have plenty of cash. Let's review some basic facts about business credit:

If you think that you need to borrow to stay afloat, are you perhaps trying to delay the inevitable? I've heard that most small businesses fail because they are not adequately capitalized. I wonder if adequate capitalization wouldn't just delay failure, rather than prevent it.

The ideal capital pattern over the business cycle is contrary to what most companies actually do. The best businesses have less leverage when a recession begins, and more leverage when the recession is over. In the good times, they are more conservative than their peers. When the recession hits their industry, they are well positioned to take advantage of competitors' weakness. Often they see the opportunity to buy a weak competitor. Their lenders respect their generally-conservative approach and provide credit to finance acquisitions. Then, when the economy recovers, the business uses cash flow to pay down debt.

Your plan must depend on where you stand at the beginning of the year. If you are currently credit-worthy, look for any last opportunities to buy weakened competitors. The window is closing, but the best acquisitions are made in a relaxed attitude, not in desparation. If you don't see opportunities now, don't fret. Relax and wait. They will come. You can deploy some cash for capital equipment and expansion, but moderately. Stay in touch with your bankers, even if you have no plans for borrowing. Explain your strategy and have them standing by. When the next downturn comes, be ready to swoop in and buy up weaker players.

If you are not currently credit-worthy, identify what you will have to do to become credit-worthy. (And I consider a business having to pay high rates of interest to be not really credit worthy.) If it's not obvious to you what you'd have to do, begin by sitting down with a banker, show him your financial statements, and ask what he or she would want to see in order to provide a line of credit. Develop a plan for the year, or for the next two years, which makes you solidly bankable. Work the plan.

If you are bankable in 2011, be cautious about borrowing. Remember that the best opportunities to spend money come in the recession, not in the economic expansion. Bide your time. Let your bankers know that you would like to have access to funding when your competitors are going down the tubes. Build your credit limit, but not your credit usage.

If you run into financial problems, be honest with your lenders. The greatest fear of loan officers is that they will be caught by surprise. So let's say that your first quarter sales don't meet your plan, but you will be able to make interest payments and comply with loan covenants. Sit down with your banker and explain that you are off track from your plan. Talk about your contingency plans. You'll probably be explaining a few false alarms as the years go by. The purpose of the conversations is to teach the banker that he will hear any bad news as soon as it happens. Then, when the recession hits and the banker is worried about all of his credits, he'll rest assured that if you had problems, you'd tell him.

If you own a small business, you might want to check out my Small Business Financial Crisis e-book.

Read the entire series: 11 Business Challenges in 2011

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