Bank Lending Difficult For Small Businesses But . . .

The Great Recession has taken its toll on many components of the economy, and unfortunately, all of us can point to examples that have affected our communities.  In providing debt and equity capital with financial advisory services to fuel dealers, my colleagues and I see the impact that reduced lending to small businesses, like fuel dealers, has had.

The Federal Deposit Insurance Corporation recently released data that shows while overall commercial and industrial lending has increased over the past five quarters, the number of small loans to businesses has been shrinking since June 2008. As of September 2011, total outstanding loan volumes to small businesses were down 14.7 percent.

There are many reasons for the decline in lending to small businesses and more reasons still for banks’ reluctance to lend to fuel dealers ‘ limited tangible collateral, ever growing line of credit needs and depressed profits due to fluctuating margins to name a few.

‘Are credit standards tighter today than they were two years ago? Absolutely. But [that’s] because we’re operating in a different economic climate,” said Robert Seiwert, director of the American Bankers Association’s Center for Commercial Lending & Business Banking. 

The Weather May Not Be the Only Thing Warming Up

As I write this article, weather for the Northeast has been generally 15 percent warmer than normal since November. What is also showing signs of warming up is the small business lending environment.  The Thompson Reuters/PayNet Small Business Lending Index has shown an 18 percent increase in lending activity to small businesses in December, representing a four year high.  Hopefully this trend will continue.  Banks we regularly work with on behalf of our clients are indicating the door to do business is open and we have witnessed firsthand successful transactions.  But fuel dealers must remember that there is still plenty of caution in the lending community. 

What’s A Fuel Dealer To Do?

The reality is that obtaining bank financing for your business will require more effort than in the past.  As Robert Seiwert of the ABA said, ‘We are operating in a different economic climate.” With our assistance, fuel dealers who have successfully obtained financing in the current economic climate have taken a new approach with banks.  We can share some of the key strategies these dealers have used:

Candid Assessment of Financial Position

Regardless of what type of financing you are requesting from the bank, a dealer must take a hard look at the financial condition of the company with particular focus on the balance sheet.  An understanding of the relationship between current assets and current liabilities – which is defined as working capital ‘ is paramount.

In our experience, the failure of the business owner to recognize a limited or nonexistent working capital position is the root cause of the vast majority of unsuccessful financing requests. This also results in most of a dealer’s frustration in dealing with a bank, since in a dealer’s mind the balance sheet has nothing to do with the purpose of the loan, e.g., new equipment, acquisitions, receivable financing, etc.

The truth is a weak working capital position may in fact be the reason why a dealer is asking for a new or increased line of credit. It may also be the reason why the company needs financing for equipment when it should be able to pay for that equipment with internally generated cash flow.

We have seen weak working capital positions doom many acquisition financings and deals.  The critical takeaway is that a dealer must understand the company’s working capital position before there are any discussions with the bank.  With that understand’an appropriate tact can be taken with the bank to achieve your financing goals.   

Understand the Purpose of Bank Financing

Banks loan money to businesses that can demonstrate both a capacity to repay the loan (cash flow) and collateral (assets) to pay off the loan if the company can’t make payments.  What has now also entered the equation is the role of the financing. 

Before the Great Recession, banks may have allowed a lingering balance on a line of credit to be paid off over time via a ‘term out.”  The reason why the line had an outstanding balance was that earnings may not have reached targets and/or cash that would have normally been used to pay down the line went to fund other needs. 

In any event, you could often count on the bank to ‘term out” this amount.  This option is limited because banks’ credit officers often determine working capital shortfalls are best solved with equity, not bank debt.  This is a big change from pre-Great Recession times and may require alternative forms of capital, such as subordinated debt and preferred equity as part of the financing plan.

Match Purpose with Structure

The days of ‘easy” lines of credit are over.  In fact, the past issuance of lines of credit that could be used for broad purposes has contributed to many of the financing dilemmas we help dealers fix.  In today’s environment, it is critical to match the structure of the financing with the purpose of the financing. 

If you are looking to purchase long term assets with the proceeds of the financing you must have a long term pay off plan.  If your financing is related to receivables, the loan should be short term and borrowings governed by the amount of receivables.  Many dealers may not like the restraints of a ‘borrowing base” has, but it is a very good safety check to prevent a dealer from falling into a financing trap from which they cannot escape.

While it is true that obtaining bank financing now requires more preparation and analysis – and may lead to addressing areas of your business you may not have immediately thought were relevant to the financing request – the environment is improving and banks are willing to lend.  It will take more work to implement the strategies noted above, but the benefits of this approach will position your company for future financial success.

About the Author: Matthew Ide is managing director of Angus Energy’s Advisory & Finance team.  He is joined by fellow Managing Director, Jeffrey Simpson.  Angus Advisory & Finance provides advisory services for improving financial management practices and banking relationships, and designs/implements growth, risk management and acquisition strategies.  The group also provides funded capital solutions through the investment fund, Angus Fund, L.P.  Matt can be reached at (860)299-6856 or

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