Need a Bank Loan? Fuhgeddaboutit!
Guest post by John Calia
Well, you’ve survived the Great Recession and your outlook isn’t quite as glum as it once was. The economy doesn’t look great but it doesn’t look like it’s going to get worse right now. Maybe – just maybe – it’s time to invest a few shekels in your business. A couple of new salespeople, some updated equipment, some new software…maybe you can get a jump on the competition. But where will you get the money to invest in your business? From a bank? Not so fast.
Inc. magazine has analyzed the latest data from the FDIC and come to the conclusion that it’s largely the big guys who are getting bank loans. Total commercial loans are up 12 percent year over year to $1.5 trillion. But, not for small businesses.
“Well, why not?” you might ask. Haven’t you done everything right? You reduced expenses during the recession; you learned how to control your inventory. You may have even figured out which products or customers were unprofitable and eliminated them. And what about the platoon of blue-suited loan officers that keep button-holing you at business networking meetings? Don’t they want to loan you money?
The questions might best be answered by looking at the other side of the coin. The Fed’s zero interest rate policies have greatly benefited smart operators whose primary skill is financial engineering rather than job creation. But the real downside is that the policy also reduces banks’ profitability on loans. Low interest rates mean lower spreads for banks that make loans. Many bankers take the view that the profit opportunity is not sufficient to take the risk of making small business loans.
Why are big banks lending? Well, the new regulatory scheme outlined by the Dodd-Frank financial reform bill is designed to ensure that Too Big to Fail (TBTF) banks do not fail. In other words, the management of those banks need not fear the consequences of decisions gone bad. There is no threat of an FDIC takeover. And no TBTF banks will be allowed to go bankrupt. After all, that’s what Too Big to Fail means.
The Bank for International Settlements estimates that U.S. bank holding companies gain the equivalent of a $300 billion subsidy by these policies. In other words, the implicit guarantee of the reforms have enabled the TBTF banks to take more risk, including commercial lending, even while their Main Street counterparts (community banks) are struggling to conform to the new regulations that stem from the same reform law.
Still the blue suits, who live mostly on commission, have to be lending to someone, right? So, what are they looking for? Well, you wouldn’t be surprised by the criteria. They are looking for a recent record of growth in revenue and profit. They will look at your projections to see how you will pay the loan back. And more importantly, they will want to see that you have control over your business. In fact, if you haven’t implemented Enterprise Resource Planning (ERP) software, they may require it in the covenants to the loan agreement.
Your CFO should be able to help you implement these new controls and reports. And, trust me, your bottom line will benefit if you take these internal procedures seriously. In other words, it’s not just the CFO’s responsibility. For these controls to work, you have to be the prime mover. Leadership comes from the top and, if you own the business, you’re at the top.
If you’re not big enough to afford the additional six-figure compensation package that a good CFO will demand, you might consider a fractional CFO. There are many firms that offer such services including my former partners at The SCA Group.
There is a lot to overcome if you need expansion capital. But it can be done. It will require a lot of work. However, if you somehow managed to survive the recession, it will seem like a walk in the park.