A New Leaf for Business Banking

Something to consider adding to your corporate New Year’s resolutions: Restart talks with your banks now.

After three years of cutting costs, laying off staff, and reining in capital spending, CFOs seem finally ready to spend some money in 2011, according to both economists and CFOs themselves. Yet loans for small- to mid-sized companies remain difficult to procure. Forward-looking finance chiefs would do well to act on their spending projections and prepare for this year’s cashflow needs today.

Companies that weathered the recession by cutting back on inventory and staff will have to stock up, and increase hiring. According to a survey last October by TD Bank, nearly 40% of the CFOs it surveyed reported plans to increase capital spending, mostly on technology. Two in 10 saw themselves increasing spending by at least 10%. In fact, cash-flow management was seen as the top challenge for 2011 — cited by 69 percent of the finance chiefs. Then in early January, Margaret Ewing, a vice chairman at the professional-services firm Deloitte, told the Financial Times: “If 2010 was the year of balance-sheet rebuilding and cost cutting, then 2011 looks set to be the year in which corporates start spending again.”

“Inadedquate” Credit Access

Compounding the pressure is the perception, among 52% of TD Bank’s survey participants, that access to credit is “inadequate.” Indeed, it hasn’t been easy for smaller companies to qualify for credit, as Fed Chairman Benjamin Bernanke told The television show 60 Minutes in December. This, he explained, owes perhaps to losses in property value. “But some also can’t meet the terms and conditions that banks are setting.” In a Dec. 30 podcast for the Northern Colorado Business Report, one commercial investor admitted that the terms for commercial lending are stringent. “You have to fit in a pretty small box in order to get a commercial project financed right now,” said Josh Guernsey, a principal at Fort Collins, Colo.-based Brinkman Partners, a commercial brokerage and investment firm. “Some deals, it’s going to be a really strong deal with a really strong borrower for those to get financed,” Guernsey continued, calling the situation the top challenge as the new year begins.

Some finance chiefs are more optimistic. Ashish Parikh, CFO of Hersha Hospitality Management, a Philadelphia-based, midcap company that provides turnkey hotel management and asset management for major hotel chains, is one. “We recently entered into a new credit facility in October-November with TD Bank and a group of 11 other banks,” he says, in a contract that increased the company’s credit facility from about $135 million to around $250 million. That’s a major increase after two years in the credit desert. “We weren’t even able to get $5 million or $2 million in the last two years,” he notes. “I think the lending market has come really far, and also our company has grown.”

Still, Parikh admits lenders that remain “very finicky as far as who they’ll lend to. But the notion is that if you’re a strong company with a stable cash flow and the ability to grow, the lenders are seeking to put money out; they’re not shying away.” That said, he adds, “there still is a big deficit in credit available to small and midsize firms. Even very good credit, companies need a strong balance sheet. Lending requirements are still very stringent.”

From the perspective of the banks, an increase in outstanding and defaulted small-business loans makes them skittish about lending to smaller firms. Bank of America reported a small-business default rate of around 16% in the first three quarters last year, for example. In the Colorado podcast, Brinkman’s Guernsey added that many of the small- and midsized-company loans banks extended pre-recession will be maturing in the coming two or three years. “So now, 2011, 2012, 2013, those loans mature, and values are down. Banks are going to need new ratios.”

TD’s Challenge: Lack of Demand

Yet as business-lending legislation kicks in, companies that were turned away by even their long-time banks might do well to bend their bankers’ ears again. In a December meeting with the 12 largest U.S. banks, President Obama showed little sympathy for those financial institutions’ wariness about how creditworthy smaller companies are, as the banks pointed to high default rates among those borrowers. On the president’s urging, all 12 said they were willing to take “second looks” as a policy at the loans they rejected in the past year.

An exception has been TD Bank, which has been “actively seeking new business in the small- and mid-size sectors,” says William Fink, executive vice president of commercial lending. “We’ve been open for business for the better part of the last three years in commercial lending.” In fact, he says, the challenge TD has faced is “the sustained lack of demand as companies have been very cautious about their debt levels.” TD, says Fink, has a strong balance sheet and, unlike its peers, has been relatively unaffected by bad loans. “CFOs are uncertain where their bank is in terms of their lending support.” To such finance heads, particularly those whose loan requests were rejected, Fink suggests revisiting talks with their bankers now, as the lending climate becomes more open. If their banks are still holding out, he recommends looking to other institutions. While TD would be one possibility, Fink concedes that as the lending market opens up, TD’s competitors for small- and medium-sized-company relationships are growing in number.

U.S. banks aren’t the only ones warned by their government to increase small-business lending. Banks in the United Kingdom will have to meet new government-imposed lending quotas this year starting in February, after scrambling to make their numbers for last year.

While businesses there also complain of impossibly high loan fees and interest rates, Peter Ibbetson, who chairs Royal Bank of Scotland’s small- and mid-sized-business loan division, disagrees. He told The Times of London this month that RBS has made funding now cheapest he’s seen in his 30-year banking career. Ibbetson urges businesses to talk to their bankers now, or be at risk of getting in over their heads in terms of cash flow. They will have to reverse what got them through the recession — reducing inventory and cutting back on staff — as the economy picks up. “They will need to restock and re-employ people,” Ibbetson explained to the UK paper, and that “will lead to a spike in demand for cash-flow funding.”

Companies that couldn’t get loans before should revisit their banks now, “before it’s too late.”

Lisa Yoon is a Boston-based writer on corporate finance topics.