When Tight Credit Is the Right Credit

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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.

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