Today's Credit Landscape; What Should You Do?

(From Wikemedia Commons, taken by Jonathunder, January 2009. Winona Savings Bank, Winona, Minnesota)

I have been writing and talking about the credit crisis, and how it's affecting the franchise industry for almost a month now. I thought it would really add value for you-my readers, to hear how things look from the "Capital" side of the table.

(This is a guest post by David Criswell of Direct Capital)

During this recession, the financial structure that small businesses use to access capital has been significantly altered and created the most difficult environment to access capital in decades.  Between the CIT Bankruptcy, bank closings and reduced/closed credit lines, business owners are experiencing first hand the effects of the embattled credit markets.

Taking a big picture view of today’s credit landscape I see three components creating the conditions businesses are experiencing trying to access capital.

      1. Fewer dollars available: There are approximately 30% fewer dollars available to be loaned out today vs. two years ago. It seems there are almost daily stories that show just how real this is. There is also plenty of objective data on this issue beyond the typical “gloom and doom” information being presented by the media. Here are some examples:

•     Asset backed commercial paper: down 50% from peak

•     Mortgage and loan direct mail volume is down 37% per marketingcharts.com

•     Securitized debt issuance: $15B in March ‘09 (with TARP) vs. $25B in March ‘08, a  decrease of 40%.

    2. Federal Reserve rate reductions are not reaching the business owner:  Per Moody’s aggregate credit card index, credit card rates were basically flat, moving from 18% to 18.5% from May 2007 to May 2009 while the LIBOR has decreased five full percentage points from 5.32% to 0.32% over the same time period.

Why is this? Some speculate that lenders are raising margins to address their problems and mitigate their risk on current and future loans. As a result business owners aren’t benefiting from the Federal Reserve’s attempt to stimulate borrowing.

     3. Changes to the “prime” credit window – Two years ago, a 620 FICO score was considered “prime”; today, to qualify for a “prime” loan, a business owner needs a 680.  This means that lenders think you’re a higher risk even if your FICO score is the same.  With interest rates being a reflection of the  borrower’s perceived risk this translates into approximately 40% higher borrowing costs for those business owners, not due to their failure to perform, but instead due solely to these market changes. 

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So What Do We Do Now?

If you are like most business owners you take the situation at face value and figure out how to move forward with the given circumstances.  As a national finance company we speak to thousands of business owners every day and here is what the most successful ones are doing:

     1.    Managing credit - It is more important than ever for business owners to actively manage and build their personal and business credit. Small improvements can make a huge impact on not only business borrowing costs, but almost all parts of your financial life including mortgages and insurance. Just by being aware, there are ways for the business owner to make the most of their credit profile.

   2.    Know your options – Even though the cost of borrowing has been flat to increasing despite the Federal Reserves efforts, there are options and competitive rates for business owners of all credit profiles.  The continuing loss of credit sources is a trend that should put you on notice and is clear evidence that the ability to finance your business should not be taken for granted.

   3.    Diversify – Out of every crisis comes opportunity. The recession and credit crunch has created plenty of new and creative products to satisfy the demand for small business financing. Business owners would be smart to insure they have access to several sources of capital.

What changes have you made in managing access to credit for your business?

(David Criswell has been with Direct Capital for 3 years. He is responsible for managing the company’s online presence and the integration of social media and emerging technologies into the company’s marketing strategy and other business units.  His experience consists of a 15 year background in sales and marketing including 10 years as a small business owner. He also blogs here.)

Comments

[David Criswell]

@sternalpr - Agreed that policy plays a big role in the credit markets, but most of the small businesses we speak with aren't waiting around. Small businesses are forcing financing sources (thankfully), bank and non-bank, to get creative and find new products that fill their demand for credit. Our experience is that money is out there, just not from the more traditional sources people are used to.

Dave Criswell
@DirectCapital

[John Sternal]

Definitely don't want to get too political with my comment here but I hope a lot of the financing and lending atmosphere changes in the future when the Halls of Congress again becomes more "business friendly". Policy can be a powerful thing when it comes to small business lending and the business landscape overall.

John Sternal
@sternalpr

[Ted Strong]

King,

I love that bank vault picture. Dare I say, it looks open?

Ted Strong