Maintaining Your Safety Cushion

Maintaining Your Safety Cushion – How to protect and get credit in this economy
B.O.S.S.™ (Business Owners Strategy Session) Session for February 22, 2010

Our value as is to provide investment and financial solutions our clients’ business and personal lives. In that spirit, we provide the B.O.S.S.(TM) sessions to help our clients’ businesses.

Last Thursday we were pleased to present Dennis G. Shaffer of Champaign Bank to review the current state of banking and tips for preserving credit in the current environment. As many reputable companies have had trouble with financing recently, this topic brought forth a lot of tips and some debate! Dennis has many years as a business banker with regional banks such as Champagne and larger banks, such as the Huntington.

The following summary is not a precise and complete review, it is a summary derived from multiple sets of notes and memories. 

Q: How has the state of banking changed over the last 6 and 12 months?*
A: It’s improved slightly. It really depends on the individual bank, but overall it’s probably improved.

Q: In looking at my loan, does my business matter- or the banks? How much does my business metrics matter to an individual bank versus that bank’s current portfolio of loans? For example, if I have an extremely solid commercial real estate deal, and the bank has too much real estate- will they automatically pass on it? Or will they examine my credit history?
A: If a bank has too much risk in a certain sector, they likely will not do the loan no matter what the credit quality is. If they do not have too much risk in that sector, then they will begin reviewing the typical credit analysis.

Q: How can I find out what banks are looking to do business in a certain sector? Can I ask them?
A: The best bet is likely to ask your CPA or attorney, especially if they have a lot of clients in your sector, as they’ll know who will be doing financing in your area.

Q: What’s the best way to establish a relationship with a banker for financing?
A: In discussing your firm with a bank, you must be prepared, concise, and be able to tell your story. Your story consists of why you’re successful and what separates you. You really need to know the purpose of the loan, which you’d be surprised how many people do not.

Q: What else will the banker want?
A: You’re going to need to have accurate and timely information on your business. This should be information you look at constantly anyways- the banker will want to see the metrics important to your business and the banker will want to see that you know and monitor those metrics.

Q: What metrics are universal regardless of the business?
A: It should come as no surprise that cash is king. For whatever purpose your loan is for, you need to show that you’ll have the cash flow to pay the payments. The typical ratio is cash flow of 120% of debt payment.

Q: What do you recommend to decrease people paying bills slower or not paying at all? 
A: Good question, one without an easy answer. First of all, you need to know who your client is. This is the first line of defense and better than any banking strategy, especially for large orders. If you are concerned about the client, take a deposit or do something to decrease your risk. From a more tactical perspective, you can actually have your deposits sent directly to the bank, which will decrease days receivable by a few days. Some even think that it may decrease defaults. In the same vein, Lockboxes can be used. [Some members of the audience had the point of view that lockboxes can also signal lack of creditworthiness as well, since companies in trouble are sometimes forced into using them.] [Mark Fissel also recommended issuing customers in default a form 1099-C, which allows you to write off the default as an expense on your taxes, and forces them to pay income taxes on it]

Q: Why has credit dried up for banks that haven’t gotten into much trouble?
A: While rates are low, the cost of doing business has still gone up. These additional expenses and reserves are capital that cannot be loaned out. FDIC premiums have skyrocketed for the industry as well. For example, on similar amounts of loans outstanding, Champagne Bank is now paying something close to 16 times what it was paying in 2006 for FDIC premiums. In addition, we were forced to prepay 3 years of FDIC premiums. All of this decreases the amount of capital available to go out for loans.

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*The following summary is not an exact quotation and is the marriage of multiple sets of notes and memories.