Tips for Success in a New Lending Environment
During the past two years in the banking industry, we have seen the pendulum swing from one extreme to the other: From aggressive, accommodating lending practices by many banks, to cautious, conservative and more traditional practices.
Personal guaranties of owners that were often limited or not required are again being required as unlimited, joint and several guaranties. Some banks were making real estate loans at 100 percent of the real-estate value or cost. Now real equity (cash) is required at 25–30 percent of the real-estate cost. Companies were able to establish working capital lines of credit with borrowing bases on accounts receivable in excess of 85 percent, sometimes including receivables more than 120 days past due. Now, advance rates on accounts receivable borrowing bases will likely be 75 percent or less on accounts less than 60 days past due, with some limitation potentially on accounts that make up a large concentration of total receivables. How long will the pendulum swing last?
The economy over the past two years, along with bank regulatory changes, has created a new landscape in banking. Aggressive practices have ceased, and traditional commercial banking has since returned. Many long-standing financial institutions that are well-managed and sufficiently capitalized did not stray from traditions. Nonetheless, no bank has been immune to the financial stress caused by the great recession and no bank escaped the regulatory scrutiny and burden that has followed.
Banks are being assessed much higher FDIC insurance premiums to pay for failed banks. Increased capital requirements are making management re-think capital allocations, product offerings and distribution channels. Regulatory changes and the passage of recent financial reform legislation are expected to add operating costs and constrict income sources. Banks will likely respond by modifying deposit account offerings for both consumers and businesses. Likewise, loan offerings will likely be accompanied by higher fees and less accommodating structures.
What could easily be an unintended consequence of all this is that some consumers and small business borrowers will see loans less accessible and more costly. The direct answer to the question of “How long will the pendulum swing last?” is the new reality and will not go away in the foreseeable future.
There are businesses out there that have had relationships with their bank for years, and many have been with their banker for just as long. Though they have had those relationships, many are finding it difficult to understand why their bank—because of many of the issues already mentioned—is reducing, capping, or eliminating their revolving lines of credit, or not loaning for that next purchase. These things are creating havoc for some business owners who rely on that working capital for daily operations. If this has happened to you, there are a number of things you can do to help maintain a healthy working relationship with your bank, or build a new one.
• Business owners should forge, preserve, and enrich their relationship by maintaining a level of openness with their banker and bank. Initiate discussion with your banker about bank policy changes, such as advance rates and loan-to-cost values.
• Be proactive in keeping your banker informed of the business by way of forecasting sales volumes, borrowing needs, cash flow, and debt service capacity.
• An updated business plan is not just an exercise; rather, it is a road map for the continued success of the company.
• It is important that your company’s financial reporting is accurate and timely.
As a final point: Bankers are more insistent on having a “global” financial picture and understanding. Global means your company, related businesses, investments, trusts, and contingent liabilities. It could also be beneficial if your company stepped up the quality of the financial reporting. An example would be to go from compilation to reviewed statements or from reviewed to audited statements. Bankers take comfort in quality financial information. But overall, be proactive, make sure you communicate effectively, and understand your bank’s view of your business and of your access to credit. 
Joe Valenciano is a commercial lending officer with Intrust Bank's office in Overland Park, Kan.
P | 913.385.8212
E | Joe.Valenciano@IntrustBank.com
Return to Ingram's August 2010