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When Tight Credit Is the Right Credit


Now wait a minute. I read last week that Jessica Alba's new movie has been delayed because of what appears to be a lack of financing. Are you kidding me? This is Jessica Alba we're talking about! She is, like, so awesome! And now I'm told her movie can't get financing?

As a business owner, I am outraged. This sounds very similar to what I'm reading about fellow business owners around the country who also can't financing. Of course the news about Jessica Alba is way more alarming. No argument there.

Things are Tough All Over

But what about the food manufacturer in Chicago that organized protests against its bank for pulling its financing a few months ago? And the auto dealer in Atlanta who accused his bank of "fraud and misappropriation of funds" because that same bank forced him into bankruptcy after he defaulted on his loans? And what of that nice lady in Florida who can't get financing to open a preschool? And the couple in New Smyrna Beach, Fla., who can't get the money to expand their golf club?

The government is accused of doing too little for small business. I'm hearing the Small Business Administration isn't guaranteeing enough loans. Meanwhile, the banks are supposedly hoarding their Troubled Asset Relief Program cash to make their balance sheets look better. And companies that need cash are complaining that getting money is much harder than it ever used to be.

And now I hear that Jessica Alba's film also ran into financing troubles? Damn you, Bear Stearns! This is all your fault!

Maybe all those small businesses and Jessica Alba really do have something in common. Maybe it's because they're finding out that it is harder to get financing than it was, say two or three years ago. Remember those days? That was when grizzly bears in the Bronx Zoo were getting loans to buy houses in White Plains, N.Y. When we were playing gin rummy with all the approved credit cards that kept arriving in the mail. When bankers rushed to back Jessica Alba classics like Good Luck Chuck and The Love Guru.

Sorry, Jessica. But those days are over.

Higher Standards for Borrowers

But don't worry. You'll continue to be fine. And so will many business owners looking for funding. The system isn't completely frozen. In fact, BusinessWeek just reported that the General Accountability Office showed SBA-backed loans sold into the secondary market increased to $135.3 million in February. That's still significantly below the average $364 million a month recorded in 2007. But that was 2007, when my sixth-grader got a loan to finance his Xbox collection. And Jessica starred in Awake. Ah, good times. Good times.

The fact of the matter is that most banks have plenty of money to lend to small businesses. They're just not lending the money like they used to. Instead, they're doing this crazy thing: lending only to those people who have the capability of paying the loan back.

"It was a big party for the last 10 years," says Robert Tabas, CEO of Royal Bank America in Narberth, Penn. "But we're well funded and happy to loan to small businesses." Don't believe me? Look at his online ad.

Royal Bank America, like many other community banks, received TARP money from the government. And yes, they're using it to shore up their balance sheets. But banks make money when they lend money. That's what they do. They're just doing it a little differently right now.

"We always reviewed cash flow," says Tabas. "But now we're looking at more global factors, like the economy, the customer's industry, and their long-term plans."

Get used to it: Banks are just not giving out as many loans as they did in the past. And they're making smarter, less riskier loans, too. They're giving more emphasis to credit reports. They're demanding tangible assets as collateral, not valuations from Cousin Vinny. They're leaning more towards established businesses and away from riskier startups. They're demanding detailed business plans and commitments by the business owner. They're going back to the basics. They're spending more time getting to know their customers, so they can get comfortable with their track record.

Due Diligence Pays Off

This is called due diligence. It wasn't being done by many lenders in the last 10 years. Banks and investors ran after those high-profit, complicated, mortgage-based-whatever deals. They lent money to people with sexy real estate projects like strip malls in Texas and condos on the Florida coast. They financed The Love Guru for God's sake!

Smart business owners can see at least three benefits coming from tightened credit.

For one, the cream rises to the top. Like the producer who somehow got financing to make one of those ill-conceived Jessica Alba films, our competitors who were getting easy financing for their ill-conceived businesses are finding that the well has gone dry. As they become overwhelmed by their debt maintenance the truth comes out: They managed things poorly. Can anyone say General Motors (GM)? Every major bankruptcy we've seen has, at its core, a loan that couldn't be repaid. Maybe we can buy them out. Or they might choose bankruptcy. In any case, like Jessica's new film, they'll either suffer from lack of funds or completely disappear.

Second, bankers are now offering more reasonable financing. It may not be as much as we want. But it's probably as much as we can afford. It's based on what we're able to pay back, not on some unrealistic projections, but on the reality of today's business climate. Bankers are making more prudent business decisions and in the meantime doing us a favor. They're forgoing some of those way-too-profitable interest payments and fees in lieu of making a good investment for a reasonable payback. And we're not being sucked into a financing deal that we could never afford to pay back anyway.

Finally, banks are now way more involved in our businesses. No longer distracted by those crazy deals, their people are spending more time looking at our financial statements and business plans. They're making suggestions and offering assistance. These good people are MBAs and CPAs. They're experienced, prudent people who work with and help hundreds of small companies like ours. You know who they are: The kind of guys that don't have a prayer of ever dating Jessica Alba. But they do bring knowledge and insight to a business relationship. Previously we couldn't even get them on the phone. Now they're calling us to "check in," and even taking us out to lunch!

So this lack of financing is not as bad as some may think. And there's more good news: I just heard that Jessica's film is back on track and that production is starting next month. "Thanks to the fans. I do movies for you. Practice safe sex and drive hybrids if you can," she is quoted on IMDB. We will, Jessica. God bless.

Gene Marks, CPA, is the owner of the Marks Group, which sells customer relationship, service, and financial management tools to small and midsize businesses. Marks is the author of four best-selling small business books and writes the popular "Penny Pincher's Almanac" syndicated column. He frequently speaks to business groups on penny-pinching topics. More penny-pinching advice from Marks can be found at www.quickerbetterwiser.com.

Gene_marks
Gene Marks, CPA, is the owner of the Marks Group, which sells customer relationship, service, and financial management tools to small and midsize businesses. Marks is the author of four best-selling small business books and writes the popular "Penny Pincher's Almanac" syndicated column. He frequently speaks to business groups on penny-pinching topics. More penny-pinching advice from Marks can be found at www.quickerbetterwiser.com.

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