2009 was wrought with disaster for Main Street businesses; from the financial crisis making access to capital nearly non-existence to the recession that significantly curbed consumer spending – both of which detrimentally hurt the cash flow of nearly every business (small and large) on this planet.
But, as we look back on a very unfavorable year for business financing, there are some lessons that can be learned as we move forward.
Number 1 - Gone are the days of cheap and fast credit. No more ‘no doc’ or ‘stated income’ loans. No longer will lenders look the other way for borrowers with bad credit. Gone are bank financing options for all but the strongest of businesses.
The bottom line is that money is not flowing freely. In fact, it is hardly flowing at all and will continue that way through 2010; regardless of all the bailouts, recovery acts or pleas from our government to open bank vaults again.
But, there are also many ways to finance a start up or growing business. While bank funds are barely trickling out the door, non-bank financing companies are picking up some of the slack. But, these products, not usually governed by banking rules, have their own distinct requirements that must be understood before applying for them.
Further, all of the numerous ways that creative entrepreneurs have found to bootstrap their business financially in the past will come back into vogue. Thus, business owners will have to rely on the value of their personal assets just as much as the value of their business assets in obtaining growth capital in 2010.
Number 2 - New regulations, designed to protect borrowers, also hurt banks if they increase their own portfolio risks. Under these regulations, the government can come in and take over the bank(s); something that no bank will put itself in just to underwrite a few subprime business loans.
Banks and many other lenders are stating that they want to lend to businesses but are just not seeing credit-worthy borrowers; which is in part understandable given our high unemployment, lower income levels and declining personal credit scores.
Banks and other financial institutions rely on both credit scores (the willingness of borrowers to repay obligations) and cash flow or income (the ability to repay these debt obligations) to make their loan decisions. Fall short on either of these and the risk to the lender increases significantly. Increased risk – means potential for a government take-over.
Number 3 - Banks are now dusting off their lending policies and sticking to them word for word. This means not only higher credit standards but specific use of funds requirements, overabundant collateral values, blanket UCC filings, and the dreaded personal guarantees will all now be required; regardless of how strong you think your business is on its own.
For business owners seeking capital, this means that, as borrowers, it is no longer sufficient to just go to your bank and apply for a loan or credit hoping that the bank will tweak its policies to fit the business’s need. 2010 will require borrowers to better understand, not only the types of loans or capital that may be available to them, but to understand the rules in which to obtain this credit.
Once these new rules are understood, the business owner will be tasked to execute their business to fit these new rules – meaning that the business must tweak itself and not rely on the banks to change their own policies for the business’s benefit.
First, business borrowers must understand what is available given the strength or stage of their business. Most financial institutions will not fund start-up businesses. But, just because your business is considered a start-up business doesn’t mean that business credit is out of your grasp.
There are many other financing products for new businesses that do not follow traditional bank rules. The goal here is to use what is available to build the business to the point that it fits in with these new banking rules.
Second, regardless of which direction your business takes, if it plans on seeking financing in 2010, it will start with your credit – the business owner’s personal credit. Prior to our current financial crisis, most financial instructions set their minimum credit score at around 640 + FICO. Today, in 2010, the minimum rate is upwards of 720 + FICO. Bad or poor credit histories will result in automatic declines – no ifs, ands or buts. Additionally, especially given the myriad number of defaults and rising bankruptcies from last year, income will be priority in all loan decisions. If you or your business can’t show (at time of application) enough income to service the loan payments – it will result in an automatic decline.
The bottom line is the rules of business financing have changed. Even though your business, from your prospective, may fit a certain product or you may just simply want a certain product – if you don’t understand these new rules of financing, you will be left in the dark to ultimately fail as the banks and other lenders are just no longer willing to take the risk.