Adapting to the New Credit Landscape

Navigating the financial markets during the past two years has certainly been challenging for companies and lenders alike. The excess liquidity in the financial markets evaporated with the economic meltdown in 2008.

Inventory levels remain soft, and manufacturing activity stumbles at approximately 70 percent of capacity. Demand for new loans has subsided as companies and consumers have curtailed capital spending in light of the economic climate.

Portfolio quality within lending institutions is being scrutinized more then ever by chief credit/risk officers and will continue to be so in this increasingly regulated environment. You probably have a keen understanding of the tightened underwriting standards if you’ve had to renew your company’s credit facility within the past 24 months.

For many companies, pricing may have increased and advance rates on collateral and lending limits may have been reduced. Loan documentation may have been enhanced with stronger language; financial covenants may have been added and guarantees may have been sought. Sound familiar?

Understanding and adapting to the current economic landscape is critical for companies seeking financing. Being proactive and realistic with your financing provider may positively differentiate your company from others.

Understanding the core tenets of credit and your lender’s approval process is important in today’s environment to ensure that your partnership continues with your existing financing provider or in developing a relationship with a new source of funding.

THE FIVE Cs

There are five key elements that remain important standards for evaluating a borrower’s creditworthiness, otherwise known as the five Cs:

1. Capacity – Loan/lease decisions are typically determined by assessing the expected level of future cash flow in addition to any collateral or guarantor support if required. Is there sufficient cash flow to service all obligations, including funded debt?
2. Capital – The net worth of an organization can be a gauge of a company’s past success and indicator of future potential.
3. Collateral – The quality of the assets pledged to secure financing.
4. Condition – Financial analysis is not limited to the company—suppliers, competitors, market share, product (or service) substitutions, growth potential and socioeconomic risk (e.g. government regulation) assessments are made as well.
5. Character – Company management strength and leadership ability is another important intangible that plays into the credit decision process and that should not be ignored. Does your company operate with integrity? This analysis also tends to affect the structure and conditions of a credit extension.

Don’t hesitate to question your financing provider. Be prepared to discuss these key elements and any other topics of concern or relevance with your financing provider. Be critical of your business and strategize mitigants for weaknesses. Loan or lease term, amortization, rate, financial covenants and guarantor requirements are all a direct result of the subjective underwriting analysis. Don’t assume that your financing provider knows your company and take the initiative to educate decision makers about your strengths.

INFORMATION OPACITY

How opaque is your company?

A bank relationship should be built on a solid foundation of communication so that any adverse impression during the credit approval process can be mitigated. That begins with providing detailed historical financials, including projections and budgets. Additional clarity surrounding “one-time” events should be duly explained. Regular (quarterly) updates should be considered, even if done in an informal manner, such as through a simple e-mail. These updates speak volumes as they are filtered through the bank’s credit team and convey that management is engaged and willing to share relevant information about current successes and challenges. Furthermore, when it comes time to renew the credit facility, sharing regular updates should translate to a familiarity with business trends and results, making the process much smoother for the underwriter.

Your relationship manager may be your regular point of contact, but have you met the decision maker(s), department managers and other senior personnel involved in determining your company’s credit worthiness? Seek them out so that you may better understand their perspective on your company or industry. Creating an advocate for your business can be best accomplished through mutual understanding. Invite the bank’s decision makers to meet with your company’s senior management team and encourage regular open dialogue.

Companies that have weathered one of the worst economic storms in history we applaud. A realistic view of your current condition, an executable strategy and a solid relationship with your funding sources made you a survivor. You’ve positioned your company to take advantage of the eventual rebound and will emerge even stronger because of it. For those of you who question the strength of your relationships with your funding sources, revisit your communication approach. Involving your financing provider early in your strategy planning could expand your financial options.

The author is vice president of Fifth Third Equipment Finance & Leasing, based in Cincinnati. He can be contacted at ChrisS.Bell@53.com.