Five Tips for Managing Your Businesses Credit Lines
Last weekend’s announcements of nine more bank closings and CIT’s bankruptcy will add more stress to small and middle market businesses in the U.S. Today, I am sure that many of their business customers are scrambling to find alternate funding sources.
These unfortunate events highlight the need for businesses to continually assess the viability and commitment of their funding sources. Here are five tips for maintaining healthy and stable lending sources.
Never trust a single lender to be there for you 100% of the time. You have trusted relationships with PEOPLE, not with a bank or lending institution. Your personal banker may be a great human being, but your banker is powerless in the face of management, who’s career (and personal net worth) may ride on defending the bank’s balance sheet at all cost. Have no doubt, if it serves their needs, a lender will quickly cut off your access to credit for reasons that have NOTHING to do with your business. For example, there are many banks that are currently operating under great pressure from various banking regulators. Those regulators may be pressing the bank to increase capital or slow down lending. In this case your banker may love you, but his /her boss is under pressure to show progress toward meeting regulatory targets.
Diversify your funding sources. Investment managers know that diversity is one key to capturing growth and limiting losses in an investment portfolio. Funding your business is no different. Depending on the size and complexity of your business, you should always have at least three reliable sources that can supply your business with necessary liquidity. And avoid borrowing from the similar types of institutions. You may love your community banker, but typically, when an economy goes sour, the entire geographic market goes with it. This means that every local or regional bank in the area is likely to be stressed and limiting new credit relationships.
A better strategy is to have credit relationships with local / regional banks, large money center or independent lenders, and access to some alternative source for funds from an insurance company or other lending hybrid. Trade publications (web sites, magazines……) are decent sources for finding lenders interested in providing funds to your industry.
Match the timing of your borrowing terms to your funding needs. Fund short term receivables with short term borrowings. Fund long term investments or capital expenses with long term debt. Most businesses are not designed to take risks associated with changing interest rates. By matching the timing of your cash inflows with credit maturities you are minimizing your risk to changing interest rates and getting the most out of your invested capital.
Establish lines of credit when you don’t need them. It is easy to recall the good ol’ days when credit was easy and your business was generating more cash than you knew what do with. That was the time to lock down credit lines. Waiting until you need the credit is a fools strategy. Why? Again it may have nothing to do with your business. Lenders’ agendas and priorities change like the wind. So even though you have been a customer of XYZ Bank for many years, bankers are usually first to run for the hills during times of economic uncertainty and politely respond to their customers, “Now might not be the best time for us.”
So take advantage of economic upswings and establish committed credit lines or backup liquidity resources. Paying a few points for maintaining committed credit lines is like a paying an insurance premium. You may never need it, but when you do it is because there is almost certainly a life or death issue.
Communicate Often. Finally, make sure that your lending sources are blanketed with information about the successes of your business. This goes beyond delivering the required financial statements per your loan covenants. Use any means possible. Make regular “social” phones calls, add your lenders to your company email or blog feed, issue press releases, publish customer testimonials, lead community events, sponsor local sports teams. How about teaching your lender how to follow your business on Twitter? Any means to “brand” your business is not only good for your prospects and customers, it creates an aura with your lenders that will give them confidence to defend your business in their credit committee meetings.