Negative Trends: Why Lending May Not Pick Up In 2010

Posted by: John Tozzi on December 30, 2009

Small business owners expecting an easier time getting a loan or credit line in 2010 should watch out for two words: Negative trends.

Bankers look at a business’s past two years of financial statements when evaluating credit applicants. The average business owner walking in with financials from 2008 and 2009 simply doesn’t look like a good credit risk.

That’s why Tony Wilkinson doesn’t expect conventional credit to ease until the beginning of 2011, when borrowers can prove that they’ve hit bottom and have begun to recover. Wilkinson is president and CEO of the National Association of Government Guaranteed Lenders, the trade group representing SBA lenders. Here’s how he put it in an interview today:

The typical small business has a 25% to 35% decline in revenue. The profit they made in 2008 is probably gone. [They hit] break even if they’re lucky. Small businesses are walking in with financial statements that show negative trends. … Before we get back to a truly normal credit environment for small business, we’re going to be in the first quarter 2011.

That’s part of why there has been stronger demand for SBA-guaranteed loans, and Wilkinson expects that to continue through next year.

Not every business has negative trends. Some regions and industries are healthier than others. Some companies managed to sustain their earlier level of sales, profits, or even growth despite the recession. But 2008 and 2009 have been bad and worse years for many firms. Until they have a better one in the books, they shouldn’t expect to find bankers eager to make loans.

Reader Comments

Brandon Abney

December 31, 2009 9:00 AM

I am a Regional Commercial Credit Analyst for Synovus Financial Corporation. I am the one at the bank who reviews and analyzes the financials and prepares the loan packet for decision. This article makes some really good points. I would like to add, however, that one of the most important credit factors we look at especially now (besides cash flow of course) is the company’s overall management ability. If there are negative trends in the financials – you need to have detailed projections (income statements, balance sheets, and cash flows) for the next 2 – 3 years with you. If you give them to your banker first before they ask for them – it shows that you are taking charge. Make sure that you are able to justify your assumptions in your projections with (hopefully) past performance or other details. It is OK to note certain weaknesses in your company’s performance to your banker (it shows that you are aware and honest; the bank will find them out when they review the credit) – the key for top managers is the ability to present a strategy that will overcome or mitigate the weakness.

Cathy

January 1, 2010 11:29 AM

Hello Brandon,

Thank you for your notes regarding preparations for an SBA Loan. How will the banks review the credit score for small businesses who were using personal net for running the business in the pass? What other information can be consider to demorstrate establishment and stability of the company?

Marianne Byrne, Esq.

January 4, 2010 9:04 AM

I agree, the article raises good points. I have been the SBA manager for the 7th largest bank overseeing new loan applications, renewals and delinquent loans and help small businesses in my private practice, the one common trend I look for was how was the business addressing the changing economy. Having been in banking for 30 years this economy is different. You cannot expect a yes if you do thinks the same way. So before you contact your lender take a hard honest look at where you are and what changes you need to make to get where you need to be. Those making the credit decisions can see through the numbers and they DO want to make the loans so be sure you address their questions upfront. If you want a third party opinion go to your local SCORE or SBDC. They are in every state and are usually free to small businesses.

Carol Cross

January 4, 2010 12:33 PM

I believe the SBA knows and understands by its own experience that 50% of all small startup businesses fail at sometime within the first five years and only a small percentage survive the entire term of the loan. (Read Mercatus on Banking, the SBA, George Mason University, for an eye opener.)

The SBA is encouraged by The Congress of the United States and the FTC to guarantee loans to small business owners, especially franchisees, in spite of and because of these grim statistics because of public policy developed by the Congress of the United States to stimulate the economy. All of the time a small business owner is working to achieve breakeven status and profitability, the economy is being stimulated -- even if the small business owner ultimately fails.

emember, however, that some lenders have been burned because the collateral of "home equity" that is used to secure "business loans" for small retail businesses like franchises has beem impacted negatively by the home mortgage meltdown and the lessening demand resulting from the recession. The price wars in the fast food sector dominated by franchises illustrates the problem created by competition in saturated markets and decreasing demand for product.

Is it is irresponsible for lenders to allow borowers to dig the hole deeper to assist short time survival of a small business that is not sustainable for the long term? But, of course, in franchising, the franchisor can survive even as many of its franchisees fail as long as the assets of the failures can be fire-saled to new owners and continue to serve the franchisor. In recessions, as long as franchisors can sell NEW franchises out the front door and acquire the assets of failures through the back door, they can survive.

There has been an increase in small business bankruptcies that is still playing out in the retail sector of the economy. The small business man is so often invisible in bankruptcy and doesn't reorganize in bankruptcy to a better day.

Apparently, the benefits of the government guarantees (now 90%) make it possible for the lenders to loan in spite of the odds as long as the borrower also has personal collateral to post as security for the loan. The guarantees together with the personal collateral does generally protect the lender and its stockholders from loss.

However, it is the personal guarantees on small business loans and leases, etc.. that drive small businessmen into personal bankruptcy when their business fails to thrive.

Even the third party opinions from SCORE or SBDC will have to take into consideration the realities of the marketplace and the meltdown and point out the ugly and good realities of trying to start or expand a small business in a deep recession. Hopefully, these third-party advisors are familiar with the grim statistics of small business failure and pass them on to those they advise.

I'm sure the banks and lenders are more than happy to extend credit to those small businesses who can prove that they have a good chance of survival by way of their financials.

The SBA and the guarantees look more to the survival of the lenders than to the survival and sustainability of the small business according to Mercatus on Banking and the SBA.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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