Expert Advice on Small Business Credit

A banker and an accountant explain what borrowers should be doing in terms of their existing loans and interest rates, and discuss future credit availability

by Karen E. Klein

The financial crisis has touched off worries among entrepreneurs about the status of their business loans and credit lines (BusinessWeek.com, 9/26/08). Will they have trouble rolling over their credit lines? Will new credit be available for small companies looking to fund operations? Smart Answers columnist Karen E. Klein posed some basic questions to two experts about this issue: Alex Grinewicz, executive vice-president for lending at Columbia Bank in Fair Lawn, N.J., and Nick Florio, an accountant and senior partner at accounting firm Citrin Cooperman in New York City. Edited excerpts of their conversations follow.

How much interest are your small business clients expressing in the credit issue?

Grinewicz: There's been extraordinary interest, not only from our small business clients but from consumers in general worrying about the banking industry, wondering if their deposits are safe and asking whether the bank will be around tomorrow. Fortunately, we're very stable and as a community bank we're not really as affected as many of the larger regional and national banks are.

What's the current outlook for small business credit availability, which has been tight most of this year already?

Grinewicz: Some banks certainly are tightening up their credit standards significantly. As lenders look at business profitability and assess the ability to repay loans, credit has gotten very expensive of late. We've been able to maintain a more reasonable cost of our products, but we're looking at things carefully as well. Because we're a relationship-based lender, we're able to work as closely with customers as we can.

Florio: There are companies with very good credit that are unable to get new loans or to get out of their current loans because of the credit crisis. I have clients with FICO scores close to 800 who can't get conventional 30-year mortgages.

What should small business borrowers be doing in terms of their existing loans and their interest rates?

Florio: I'm telling small business owners to look at their loan documents, see what interest rate their debt is tied to and consider whether or not refinancing makes sense. There's a lot of confusion over interest rates right now, particularly about the LIBOR, the London interbank offered rate. There are different periodic LIBOR rates that are used and the short-term LIBOR rates have spiked recently. It is still a stable product, but they are adjustable rates and so if you're concerned you should check with your banker or your financial advisor about whether your interest rate is changing, how that will affect your payments and what your options are for refinancing, given these tight credit markets.

Grinewicz: Communication is the key. If your payment is going to be substantially larger, talk to your banker about what payment options are available. Perhaps you can arrange a restructuring of the credit, agree on different terms or get a changed collateral mix. We're asking our customers to be realistic in this market to recognize that we're doing what we can.

Some small businesses may be feeling the pinch financially this year. What's your advice for them?

Grinewicz: Take an honest approach. Again, talk to your banker if there are problems and it's likely that they'll try to work with you. We are seeing, with the various financial statements coming in from our borrowers, a significant decline in some revenues and a slide in some companies' profitability. We're concerned, but if there are problems with our clients, we prefer to know about them sooner rather than later. It's much worse to prolong a problem or to not discuss it and hope it goes away.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.