(Oct. 6, 2008) — Credit is the lifeblood of many companies. So when shenanigans on Wall Street and in Washington threaten the availability of credit, even to healthy firms with long track records of success, it can cause major problems.
But for longtime industry veterans, the latest credit crunch isn't anything new. In fact, senior reporter Bill Bregar last week came across a story we published back in 1991, the last time plastics processors had trouble getting credit.
The story included a sidebar intended to give small companies insight into how lenders evaluate companies for loans, as well as advice on how to get through tough times. The tips are still relevant today, so here's a summary for those who are “new” to the industry.
First, a list of concerns that lenders have when they evaluate a loan request from a small business:
* Financial history. Is there at least a three-year financial record to examine growth trends for the firm? Loan officers look at the cost of goods sold, and general and administrative expenses. What about profit? Is management financing growth of the business, or is it buying new cars or other nonessential assets that might signify immaturity of the owners?
* Cash flow. Lenders want to see profitability to assure them that the loan can be paid back.
* A track record of performance. How well has the business performed in its chosen markets? (We didn't include this back in 1991, but lenders today also look at the end markets themselves, the extent of overdependence on any one or two customers, and the stability of the company's customers.)
* Collateral offered. Lenders look hard at the value of equipment or other assets being purchased compared to the loan.
Here's the advice we offered for small-business people who need help from their bankers in tough economic times:
* Shop around for money the way you shop for a car. Some lenders might offer better terms, or offer to finance a greater percentage of the loan, or offer better terms of repayment.
* Work with your banker or accountant to determine what type of loan is best for your situation.
* Try to get the loan through the bank where you are known, but look at other institutions, too.
* Develop a relationship with your lender.
With all the changes that the plastics industry has seen in the past 17 years, it's interesting how most of this common-sense advice still applies today. Perhaps the biggest change, though, is that fewer companies today are owned or managed by people who are light on financial experience but experts at getting the most of out their workforce and machinery.
But even with all the collective expertise of all the accountants and MBAs in the industry, there's something to be said for experience. If you're one of the rare executives who has now lived through two credit crunches, take a deep breath and give yourself a pat on the back. You're officially a survivor.
Lenders are a fickle bunch — one day they're pounding on your door, offering easy money. The next they won't return your phone calls. Tomorrow (or maybe the day after tomorrow), they'll be looking for business again. Help your company survive until then, and make sure you are prepared for the next downturn.