Banking in 2010: Dealing with New Realities
The message banks are sending to construction executives—and to any other business owners who are looking for credit—is quite simple: Don’t take anything for granted. The loans and credit extensions that used to be almost automatic are no longer a sure thing.
Operating in this economic landscape, businesses are looking for more help at a time when banks have become far more cautious about providing it. With federal regulators scrutinizing banks that have underperforming loan portfolios, lending officers are not only defending their existing portfolios, but also are looking more carefully at requests from prospective borrowers.
For businesses, the harsh reality is that the sins of the banks that went overboard with careless lending are now affecting their clients: the borrowers. Getting credit had become too easy; in the wake of the excesses, the pendulum has swung back in the other direction.
That swing has hurt smaller businesses, especially those that don’t have established relationships with local banks. According to the U.S. Small Business Administration, nearly 90 percent of the nation’s 26 million small businesses use some form of credit for operating costs and expansion. However, many small business owners cannot get traditional bank loans because they may not have a credit history. Instead, they are forced to rely on securing home equity loans, personal loans, auto title loans, and credit cards to obtain credit.
For the construction industry, the credit crunch couldn’t have come at a worse time. With fewer jobs going out for bid, contractors must keep estimates as low as possible to secure new projects.
Meanwhile, costs continue to rise. Although there is still little sign of inflation for the overall economy, construction is vulnerable to fluctuations in the global demand for raw materials that tend to have more volatile pricing than consumer prices. The U.S. Department of Labor’s producer price index showed the price of construction materials and supplies fell 0.9 percent in June after seven straight monthly increases. However, prices are still up 4.2 percent compared to June 2009.
The Rules Have Changed
If a company is profitable and well run, and has a positive cash flow and plenty of liquidity, there’s no reason to think it won’t get the financing it requests. But don’t be surprised to get requests for additional information, such as aging of accounts receivable and payables, job status reports, interim financial information, personal guarantees supported by tax returns, and a personal financial statement.
Given the current banking situation, the best advice for construction executives is to tighten up operations and learn how to deal with the new realities.
Don’t forget that before the banking and real estate bubbles burst, the construction industry enjoyed years of sustained prosperity—a period in which contractors could turn a decent profit even if they weren’t well managed. Also, remember that the prime reason a business is successful is because its leaders know construction; the challenge now is to understand finances as thoroughly as operations. A construction executive has to be a good manager, and must be able to prove it to the bank.
Because the bank will be asking for more detailed information than in the past, contractors should take this opportunity to show how well they know their businesses. Be among the best at cash flow projections, which will help in securing financing and improving day-to-day operations. Carefully organize all records to show the company has the ability to repay.
The bank wants to know it’s loaning money to someone who handles it wisely. If an executive is doing the right things to manage his business, the bank is more likely to reward the company with the financing it needs. Be prepared to report that the company has renegotiated its employee benefits package, reduced overtime, and cut spending on non-core items.
Look for New Options
If a request for financing is turned down, don’t take it personally. Remember, some banks are pulling back from lending now because of mistakes made in the past. As a result, a company may no longer be a good fit for the bank’s portfolio. Or, the bank may have set a floor on its prime rate at a level above the national prime—thus increasing the cost of borrowing.
The realities of 2010 may dictate the need to find another lender that is more eager to do business. Don’t be afraid to check out the competition. Although the interest rate may be a little higher, some banks can offer financing backed by the U.S. Small Business Administration.
Also, look into financing and grants offered by state
economic development agencies. Options for construction companies may be limited, as contractors usually are looking for cash to buy supplies and equipment or meet payroll, while economic development offices tend to be boosting new or expanding companies. However, a company might consider seeking funding to own its own warehouse or garage space to help the business grow.
Playing by the new rules will require some adjustments, but they’re adjustments contractors have little choice in making. To keep financials in order, communicate frequently with bankers and accountants, and don’t hesitate to ask for advice.
Reprinted with permission from Construction Executive (August 2010), a publication of Associated Builders and Contractors Services Corp. Copyright 2010. All rights reserved.