You think it’s been tough now… just wait

We have been suffering the ills of a difficult economy for a couple of years.  For the most part, those companies that were able to hang on, did and the weaker ones have either failed or are in the process.  To stay healthy during this time many companies downsized their employment, ditched inventory and did not replace any fixed assets unless quite necessary.  Many positioned themselves to take advantage of the recovery – whenever it comes!  Well, I hope it comes slowly.  Why?  To get a lot of orders at one time requires a build up of permanent working capital along with cash, trade credit or bank loans.  Working capital has likely been weakened, cash is still tight, trade credit will be difficult because your suppliers are in the same boat and bank loans – well that’s going to be the hardest.

Bankers work off the C’s of credit.  Unless your business is different from so many others, you are likely more leveraged (higher debt to worth ratio) which equals weak condition – a C of credit.  Profits have been weak or maybe some losses have been recorded that leads to weak cash flow – a C of credit.  Since real estate is depressed, equipment values are lower and many other businesses have weak balance sheets (leading to weak account receivable) the collateral is weak – another C of credit.  All of the does not add up to a pretty picture with bankers.

The other side is that your own bank may still be recovering from a weak economy and has a number of problem loans needing attention.  They are not interested in taking on any significant or even moderate risk.  It’s easier to say no in this market.

What to do?  Look at your own bank.  Did it take government money?  Is it still in trouble financially?  Check the ratings of your bank with Bankrate (safe and soundness rating) or Bauer Financial.  Now see if there are other bankers in your area that “did not participate” with the troubles we have recently encountered and are in good shape.  Begin to develop a relationship with one of their commercial lenders.  And get your own house in order.    Strengthen your balance sheet.  Make a profit – no matter how small and make sure cash flow is positive.  Grant credit terms to those customers who can pay – and by all means get rid of the bad accounts – collect them or file a claim and clean up you balance sheet.

Those who are best prepared, get the spoils and ultimately get a head start on the next business cycle!


Filed under Banking

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