BY ROBYN GOLDENBERG
Adequate capital to invest in the growth of a business is crucial, and it’s hard not to wonder if capital is drying up when you hear about the failure of banks. Although navigating financing for small to medium-size businesses (SMB) can be challenging even in the best of times, don’t panic. The three troubled banks in the news had many issues causing their problems. Get the facts about what’s going on.
Remind yourself every day that, in general, the economy is doing well. The federal banking system is strong and well-prepared to monitor conditions and manage individual banks through the challenges they’re facing. Low unemployment means businesses are busy doing what they do to supply demand. Stuff happens when market conditions change; there will always be losers and gainers.
What’s in the news?
Stock banks and SMB lenders—Signature Bank, First Republic Bank, and Silicon Valley Bank Corp.—required additional funding due to liquidity issues. But not all SMB lenders are in trouble.
The good news is that Market Watch recently reported that “102 of 108 banks listed showed expanding margins for the fourth quarter from a year earlier.” Top performers expanded by at least 1 percent in a year, while banks with liquidity issues had less than 10 percent expansion or contraction.
Some background details
What we care about most is the health of SMBs. We also know that SMB financing is very important. However, some SMBs have depleted cash reserves due to COVID shutdowns, supply chain issues, inflation, and payroll hikes. Delays increasing prices for fear of losing market share aren’t helping recovery. Large balance loan payments for EIDL and Main Street loans are difficult to manage, especially during tough times.
Eroded profit margins make it harder to maintain an adequate balance sheet that supports additional lending. Playing the tax minimization game jeopardizes many small businesses’ access to bank funds in the best of times. Rising interest rates make loans more costly, further digging into profit margins that may already be stressed.
At the same time, the sources of most lending—banks—face their challenges. Years of lending in a low-interest rate market are now over; it sounds like it could be good news for banks on their income side, and it likely will be once banks get through the transition. But first, they must deal with rising interest rates on the expense side along with stricter lending standards.
An existing low-interest loan portfolio means limited income from term loans and mortgage lending. That limited income portfolio now runs smack into higher borrowing costs to access capital and maintain adequate reserves.
Going into a cycle with a low-profit margin that then collides with higher costs and fixed revenue can cause sleepless nights for any business owner. The need for profit runs smacks into obligations that can’t be quickly unwound, and which can quickly turn into losses. But turning things around fast in under-declining profit conditions is something that is hard for banks to do on their own.
Further adding to the problems is a slowdown in lending demand over the past several years. Five million small business owners turned to non-bank lending via EIDL. Some SMBs have stopped pursuing additional borrowing, while others with balance sheets that are underwater don’t qualify. Pressures in the housing market cool demand for real estate loans. All this makes it harder for banks to transfer into enough new, higher-interest-rate loans to support their balance sheets.
What to do next?
As I mentioned earlier, don’t panic through this transition, but if you’re sensing any of the above issues, you have options to minimize your risk and get access to financing.
↹ Look for banks that are better prepared for rising interest rates and slowing loan growth. Look at a bank’s net interest margin. Keep your eye on the FDIC insurance limits of $250,000 compared to the balance your company keeps in each bank. Remember that many loan covenants require minimum deposits to support lending already in place—which may mean you have no option but to stick with deposits beyond what the FDIC will insure at your current bank. And stay tuned for further FDIC announcements on what will happen to uninsured depositors.
↹ Look for banks with improvements year over year on the net interest income/average assets (NII/AA) ratio. It’s not necessarily which bank has the NII/AA ratio, as some banks in trouble still had last quarter ratios of 3 percent or higher. Instead, look for banks with the one-year expansion of the NII/AA and watch out for those with declining ratios.
↹ If you carry high account balances with any one bank, consider spreading your risk. Managing cash in multiple locations takes a bit more effort, but it may give you peace of mind to know that the FDIC fully insures you. But before you decide to do that, read on. You must keep your bank covenants in mind.
↹ Contact your bank manager for their input. In general, we advise you to stick with local and regional banks. They are closer to being “on the ground” in your local market, aware of your business’s role in the success of their client portfolio, and more able to make localized decisions, within reason, to support your business and get you SMB financing.
↹ Be prepared to educate your bank management on the status of your business and your industry. The bank may be watching your sector but may not understand the nuances of your niche or where you stand competitively. Do what you can to boost the bank’s confidence that you are a good risk for SMB financing. If they have a critique, don’t get riled up. Listen carefully and ask for their suggestions. On the other hand, if you can’t get access to management or you feel the bank isn’t listening, consider shopping around to see what you get as a reaction from other banks. Right now, banks are looking for good-quality customers.
↹ At the same time, don’t expect any bank to bail you out if your balance sheet is underwater. If you’re not sure what that means, talk to your banker to get their view on how you’re looking. Contact a financial strategist to advise you on how to make or keep your business “lendable.”
↹ Figure out your obligations to your current bank partner. How much do you have borrowed? What do your loan covenants require for deposits to back up those obligations? For example, if you have a credit line with a balance outstanding, you probably have cash and accounts receivable under 60 days past due that are more than that outstanding balance. Pull out too much money, and the bank can call in the balance due on your credit line. Don’t go there!
↹ If you’re worried about the cost of existing credit lines and other loans with adjustable rates, discuss terming out these lines and loans into fixed-rate instruments with your banker. If you have an EIDL, keep your loan payments current. That’s going to be among the best low-interest lending you’ll get; don’t jeopardize the loans by getting into past due status. Consider getting a life insurance policy—the EIDL is for 30 years and may outlast you. Don’t make your SMB financing a problem for your successors to deal with. If you have Main Street Loans, meet with your banker to discuss options. You may have options depending on the quality of your assets.
The bottom line
Take a hard look at your profit picture. If your business is not making enough profit, raise prices—and do it now! Look for high-quality customers who will pay a premium for what you can provide them. If you’re selling B2B, invest in expanding your sales force to increase the flow of new, good-quality business into the pipeline.
If you’re selling B2C or B2B, take a hard look at how well your marketing efforts are doing to produce leads. Seek additional input from marketing strategists who can point out ways to improve your results.
Do your best to align with quality business partners. Take a good look in the mirror about where you stand, so you can build an action plan to get where you want to be. It will take some time to change banks or spread risk across multiple banks if you think that is needed.
Get solid advisors in place to help you work through any challenges your business might face. It would help if you had an outside perspective to make good decisions when it comes to SMB financing, because making good decisions is what your job as owner and CEO is all about. [CD0523]
Robyn Goldenberg is vice president of Strategy Leaders. She can be reached at firstname.lastname@example.org.