Making Sure Your Business Survives in the New Economy

There’s a major disconnect between companies and their lenders.

While businesses are still playing by the old rules, lenders have a whole new set.

How has the credit game changed? In a word, dramatically. Until recently, when it came to the evaluation of financial condition, most companies relied on the financial statements prepared by their accounting firm. That doesn’t work now.

Everyone is asking tougher questions: How do you determine which information is credible? Can the figures be trusted just because they look good? If they do look good today, will they be that way tomorrow?

If you’re an investor, how do you make investment decisions? And, if you’re a supplier, how do you go about making decisions on extending credit to your customers? Is past performance a reliable basis or have all the old rules been thrown out?

That’s not all. Whether you’re a business or an individual, how do you select a bank or investment house for your money? For most small to mid-size companies, those decisions were relatively easy. If we knew a banker, we could be quite sure to get the financing. Due diligence was generally minimal. We trusted the system to work for us.

The New Economy is taking us into uncharted financial waters.

Questions that were not even considered a few years ago are coming up now.

For example, your company is in the market for equipment that requires maintenance and service contracts. In the past, most purchasers checked out the supplier to see how long they had been in business or merely went on their reputation. Experience indicated that nothing more was needed, even though it may have been a less than prudent practice.

Today, we worry about the viability of companies we’ve been doing business with for years. Will they be there to fulfill their obligations?

In a recent conversation with a customer, I asked how it was going.

"Business is OK, but the receivables are there," he reported, but he’s also having a hard time collecting from his customers. "How far should I go in extending credit?" he asked himself. "How aggressive can I get in collecting? I don’t want to lose accounts, but I don’t want to get caught holding the bag, either."

These issues were very much on his mind, particularly since a longtime customer had just shut down, owing him $27,000, which he had to write off. "How many times can that happen?" he asked. "Frankly, I never imagined that this account would go out of business."

At the same time, his suppliers are pushing him to be more aggressive with collections since they don’t want his account to get either too high or too delinquent for fear that he may be the next victim.

Is it any wonder why so many companies are feeling stifled? On the one hand, they are uncertain how to protect themselves from accounts going bad and on the other, they are thwarted by onerous borrowing requirements.

The approach taken by many bankers is simply to cut off credit. This was underscored at a recent hearing of the U.S. Senate Small Business Committee when a business owner from New Orleans reported that the bank where he had been doing business was sold and his credit lines were cut off, even though he had never missed a payment. Unable to find a new lender, he was facing the possibility of going out of business.

It’s not necessary to look very deep to figure out why this is happening. Bankers see conditions changing so rapidly they are simply reducing their risk as close to zero as possible. While we may find it difficult to justify the strangling impact such policies have on business, the message is clear: In this business environment, there are not enough reliable ways to gauge when disaster will strike. It’s showing up everywhere, including the use of consumer credit cards, where it’s reported that those with excellent credit histories are having their limits curtailed, sometimes drastically, simply because they are shopping at stores frequented by customers with poor credit histories.

Here’s the point: when there are no stable, verifiable credit benchmarks, all bets are off. This will eventually change. Nevertheless, it’s prudent to assume that current conditions will prevail for a substantial period of time. And before credit "loosens up," if it does, every business is faced with serious credit issues, particularly when we take into account the fact that 40,000 businesses a month have been closing their doors recently.

If all this isn’t enough for any company to bear, there is also the fact that those who own and manage businesses are incurable optimists. The cup is always half full, and there are no storm clouds on the horizon. "Our customers are different," we say. "Anyway, we know them. We’ve been doing business with them for years. Others may have problems, but I don’t think we have much to worry about."

It’s this positive, upbeat attitude that allows entrepreneurs to see their way through what others shy away from: "Hard work conquers all; there are no barriers, just opportunities."

As the foundation of our economic system, this attitude attacks problems and solves them. As entrepreneur Will Pike says in William Martin’s historical novel, The Lost Constitution, "We might be dreamers, but we have to be doers, too. So we get up in the morning, we go to work, and we solve our problems."

The problem we need to solve now is figuring out how to be neither too conservative nor too aggressive when it comes to credit. And since all bets are off, there is one primary, essential guideline for avoiding trouble, one strategy to keep us from alienating customers on the one hand and finding ourselves faced with high receivables and uncollectible accounts on the other.

The solution is both simple and demanding. The task is to stay closer than ever to every customer. Here’s how to do it:

• Never assume you know what’s happening in the customer’s business and never think you know enough.

• Never assume that what the owner or manager tells you is accurate. They aren’t liars; they are optimists and want to put on a good face when it comes to business.

• Check credit reports frequently, but don’t assume that a "good" report is an accurate measure of financial health.

• If you’re not satisfied with your level of knowledge, make discreet inquiries. Who do you know that knows the customer?

• Make a point of visiting customers regularly and keep your eyes and ears open while you’re there. Talk to employees and ask them how it’s going.

• If you depend on salespeople or reps to obtain information, spell out exactly what you want them to look for, including making regular (define this) visits to the business and what they should look for. Indicate that you expect written reports. This also places responsibility on them to see clients more often and to strengthen relationships.

Managing credit issues today is a serious intelligence-gathering function. Even small pieces of information are part of the overall picture, and you need to obtain everything you can so you can act before a serious problem arises.

Besides avoiding financial trouble, there’s another enormous upside to staying very close to the customer. It can lead to more business and with the accumulated information, you’re better prepared to meet their expectations.

Here’s an example of the benefits of staying close to the customer.

We’ve been arranging equipment financing and working capital for a $1.1 million printing company in Texas for the past 10 years. While talking to the owner recently, he said his cash flow was tight. After probing a bit, he admitted that one of his customers, a publicly traded company, had gone out of business, leaving him with a $43,000 check. He was now scrambling to pay his bills. When I suggested that we could provide some relief in his payments, he was thrilled with the offer. We re-structured his note by delaying a couple of payments and then reducing the following six payments by 50 percent. After that, he would go back to full payments.

After the arrangements were completed, he confided that he had been considering Chapter 11. Clearly, assuming his past performance was good enough would have been disastrous. By staying close to him, however, he could get through the rough spot and continue making his payments to us.

Staying close to customers is a solid business strategy, one that can reap benefits for everyone involved.

Edward A. Testa is Vice President of Sales at Greystone Equipment Finance Corporation based in Burlington, Mass., a company that specializes in equipment lending and leasing. Ed has more than twenty years experience in the equipment financing industry and can be contacted at etesta@greystoneefc.com or 888-894-4332.