The tough conditions in the credit markets require small businesses to communicate and demonstrate their credit worthiness to satisfy exacting credit risk standards of lenders. Credit channels are open and loans are being made but strict federal regulations and heightened risk aversion by lenders places additional burdens on borrowers to demonstrate they are a good credit risk.
“You have to be prepared,” said Robert Seiwert, a senior vice president with the American Bankers Association. “If you have a viable business model and the banker feels that this business model is going to work in this new economy, you have a very good chance of getting financing. But you have to be ready to show that it will work.”
"Small and medium-sized businesses are the lifeblood of the U.S. economy. Their ability to prosper and grow is key to job creation to help our nation recover from the economic slowdown. But with the number of bad loans mushrooming in recent years because of the economic downturn, federal regulators have put in more stringent guidelines for qualifying for financing.", stated Ken Lewis former CEO of Bank of America.
Communication with Lenders is Key
Maintaining an open line of communication with your credit providers is key. During times of prosperity the lines of communication are open; but during times when businesses face adversity the phone stops ringing and lenders start to get nervous. When business conditions get difficult businesses need to communicate with greater frequency and openness with their lenders. Bankers don't like surprises.
Reason to Communicate: Risk Assessment
The entrepreneurial nature of small business owners make them natural risk takers. They have an unshakable belief in the fail safe nature of their ideas and have strong ego identification with their business. This often makes them blind to the risks lingering within the business enterprise. Their innate optimism may also cloud an ability to objectively analyze business risks and prevent them from seizing opportunities as a result of poor assessment capabilities.
Conducting a disciplined business assessment will uncover the risks and opportunities present in the enterprise and in the markets that the business serves. This risk assessment is a great opportunity to communicate to lenders and credit providers that business management are capable risk managers and are a worthy credit risk. Lenders will be impressed by the transparency of your risk governance practice and will be more disposed to provide financing for projects and opportunities that will propel future growth.
Banks are looking for businesses that are prepared with their financial and business plans. Business owners must present a clear purpose for the loan tied to clearly defined business objectives. The risk assessment exercise is a vital tool that assists in the construction of a business plan that builds lender's confidence in your business. The assessment will reveal the largest risk factors confronting your business and outline clearly defined opportunities that promises optimal returns on loan capital.
Its music to a bankers ears that clients are managing risk well and have identified the most promising opportunities for business investments. It is usually a recipe for success and that will allow you and your banker to develop a trusted business relationship based on honesty and transparency.
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Risk: SME, commercial lending, alternative credit channels, credit risk, community banking, small business lending, business plan, capital raise, risk assessment