The New Normal in Bank Financing

As the recession winds down and banks are trying to decide how they are going to do business, many of them recognize they need to do business differently than they are today, but aren’t completely sure what changes they are going to make. I believe we will some changes that many businesses won’t like, but will give an advantage to businesses that are profitable, have strong business practices, and that have survived the recession mostly intact.

 

The new permanent “normal” in banking should emphasis safety over bank profits. If bankers learn anything from this recession, they should learn the following lessons:

 

• FICO credit scoring has no place in commercial lending. It might be a decent tool to use when making a car loan to individuals, but it was never designed to be used in commercial lending.

 

• Loan officers can no longer just be salespeople. They must have much stronger analytical skills and general business skills so they may properly evaluate a business’ ability to repay debt and thrive.

 

• In addition to examining a business’ financial statistics, banks and bankers must examine a prospective business borrower’s business practices. There should be a high correlation between a business’ use of strong business practices and the financial ratios that result from them.

 

• Loans must be priced so the bank earns the required target profit margin as well as matching price to risk.

 

• Banks must be willing to decline loans that it does not believe meet its safety and profit criteria.

 

What does all this mean to a small business owner?

 

It means that small businesses must strive to incorporate strong business practices into everyday business. Small business owners and managers must be able to read and use their financial reports and more importantly understand how to use their financial reports to manage their business better. It means that small business owners must learn to manage their cash better efficiently.

 

It will mean that many businesses that were able to obtain bank financing during the last 10 years won’t be in a position to borrow in today’s safety minded banking environment.

 

If you are a small business owner you can educate yourself on what is necessary to become a stronger business. You can use your trusted advisors (CPAs, Attorneys, risk managers) to help you make your business healthy and bankable.

 

The first step is to realize you have to do it, because this is the “new” normal.

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Sam Thacker is a partner in Austin Texas based Business Finance Solutions.

You may contact Sam directly at: sam@lesliethacker.com

or follow him on Twitter: SMBfinance

 

EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.