Owners of small and mid-sized companies say they’re finding it more challenging to secure credit. And when they do, it’s more cumbersome.
What’s the best way to secure the best financing? Prepare now to make the path easier to a loan renewal or new lender, says Frank Gallo, senior commercial lender at Tropical Financial Credit Union. His department offers commercial loans with no application fees or pre-payment penalties.
It’s clear that lenders are pulling back. In a January survey of senior loan officers, the Federal Reserve found “tighter standards and weaker demand for commercial and industrial (C&I) loans to firms of all sizes over the fourth quarter. Furthermore, banks reported tighter standards and weaker demand for all commercial real estate (CRE) loan categories.”
Banks that reported tightening lending standards in the fourth quarter of last year “cited a less favorable or more uncertain economic outlook, a reduced tolerance for risk, less aggressive competition from banks or nonbank lenders, and deterioration in their current or expected liquidity position as important reasons for doing so.”
With proper preparation and planning, Gallo says that qualified applicants can find financing. Here’s how:
Company owners and managers should now check when their loans and credit lines expire. Even if the date is a year or more away, they should anticipate the same level of difficulty in obtaining credit that exists now, so it is better to get an early start, exploring their options.
Second, they should ask business contacts who’s lending and who’s not. Ask around and do some homework by talking to accountants and lawyers who may have referrals. Some institutions have stopped accepting new borrowers. Others are paring the number and types of borrowers they are renewing loans and credit lines. It’s important not to assume that your current bank will renew the loan.
Third, company executives should be prepared for line-by-line examinations of their finances. Financial statements must be accurate and up to date, including the current fiscal year. Preparing sterling reports will take time, so starting much earlier than in past years can produce financials that stand up better and accurately describe the current state of the business.
What should be in a loan application packet?
- Most recent profit-loss and balance-sheet statements
- Past three years of business and personal tax returns
- Cash reserves supplemental statement
- Detailed information on assets, including their age
- Other information that demonstrates financial well-being
The money invested in an accountant’s time to check for errors and correct them can pay dividends. When lenders cannot find faults in the numbers, they’re more likely to approve an application.
The situation is strained, not hopeless, Gallo says. With the proper preparation and strategies for finding other sources of financing, small and mid-sized companies can find the financing they need. Gallo emphasizes that it is smart to look at multiple options and to work with only experienced, local lenders that have a vested interest in the local business community.
