Business owners rank access to capital as the most important issue facing privately held companies. A highly-skilled CFO Consultant can significantly increase your company’s chances of obtaining the needed financing. According to a poll of 1,221 entrepreneurs released this month by Pepperdine University, in the past six months, only 17% of loan-seeking businesses with less than $5 million in annual revenue landed bank financing, and 37% of respondents from privately held companies with revenue greater than $25 million have successfully secured bank loans during this same period.
Small to middle market companies expected 2011 to be the moment a years-long credit freeze would finally begin to thaw. However, as pointed out in a recent Wall Street Journal Article, borrowing has only gotten worse. As a matter of comparison, loans outstanding to small businesses totaled $609 billion at the end of March 2011, an 8.6% drop from a year earlier, according to the most recent data from the Federal Deposit Insurance Corporation, which analyzes loans of less than $1 million.
Another lending analysis, by the Federal Reserve Bank of Kansas City, shows that big banks’ outstanding loans to small businesses dropped 14% between March 2010 and March 2011, while loans by smaller lenders fell 3%. “This area of the economy is in such crisis,” says John K. Paglia, a finance professor and senior researcher for Pepperdine’s report. The lack of credit “is improperly penalizing companies that will be very successful down the road.”
The numbers for smaller businesses also stand in sharp contrast to what had appeared to be a recent rebound in lending. Last summer, after years of tightening standards, a majority of banks reported they had eased underwriting criteria for small businesses, according to a quarterly survey of loan officers from the Federal Reserve. In the 2011 first quarter, a majority reported stronger loan demand from small firms, reversing a multiyear trend. But most of the loan recipients appear to be the largest of independent businesses—such as those with multiple revenue streams and ample loan collateral—rather than smaller companies. Commercial and industrial lending, an indicator of business-loan demand, totaled $1.26 trillion in May, up 3% from a year ago, according to the Federal Reserve.
However, March data from the FDIC shows that commercial and industrial loans of less than $1 million, which are generally issued to small firms, dropped 10% from a year earlier. Many small to medium sized companies frustrated by lack of options from their banks are now trying to secure capital from private investors which is typically the most expensive form of financing and have expected investor payouts that is of a much shorter time horizon than the business owners.
For their part, banks say that they are trying to comply with federal regulators, who want to ensure that the financial collapse—in part caused by lenient underwriting—doesn’t happen again. The main issue facing lenders, is that regulators are asking for proof that the loans will be repaid. That can be tricky with smaller, historically riskier businesses, particularly in an uncertain economy where property—often used as collateral for loans—keeps falling in value. Further, regulators are requiring banks to hold more capital in case loans default, leaving them with less to lend. Indeed, according to the Pepperdine study, more than three-quarters of bankers said they felt increased pressure from regulators, and 61% of those bankers reported that they have rejected loans they otherwise would have made to please the federal overseers.
That’s hampering many small-business owners’ plans for growth. In many cases business that would have bought equipment and capital assets to expand their business are instead entering into more costly short-term renting arrangements for equipment or leasing.
A highly skilled CFO Consultant will assist a company to understand how and what to present to prospective lenders to obtain needed financing. The financial presentation will very clearly show lenders the company’s current and projected financial position as well as current and projected operating results and cash flows. This financial presentation needs to very clearly show what the new funds will be used for and the expected increased operating profits, cash flows and liquid working capital that will be generated from the company deploying this capital. In addition to the financial presentation, a highly skilled CFO Consultant will add a level of confidence to the lender(s) that the financial presentation and underlying assumptions are sound. Also as we have found, Harvest CFO Consultants bring to companies their existing banking relationships which greatly improves the probability for success.
