Obama Tells the Banks to Lend!

by Martin Harshberger

More Management Articles

Published on this site: February 5th, 2010 - See more articles from this month

Any kind of real recovery and job creation is impossible without access to credit by small to mid-sized businesses.

A newsletter from the Small Business Administration dated September 2008 provides the following interesting figures about U.S. small businesses. It says the firms with fewer than 500 employees -

• Represent 99.7% of all firms with employees.
  
  
• Employ about half of private sector employees.
  
  
• Create between 60% and 80% of all new jobs during the last decade.
  
  
• Generate more than half of non-farm gross domestic product.
  
  
• Employ 40% of our nation's scientists, engineers, and computer workers.
  

In spite of that information loans are tough to get for small to mid-sized businesses.

Banks are looking for businesses that present no risk. Loans if they make them, must be over capitalized, and in nearly all cases personally guaranteed by the owner.

Even profitable small to mid-sized businesses in the U.S. have trouble getting asset-based financing using receivables and inventory as collateral.

New entrepreneurs, and even experienced business people, often ask me to help them write plans to get SBA financing for a new or troubled venture. I tell them it just doesn't happen that way. The SBA, USDA, and most other federal loan programs simply guarantee bank loans. You have to get the bank to approve your loan first. But banks are not in the venture capital business. They want secure loans.

Every business owner or CEO must start with a vision and a well-constructed plan. Then evaluate all decisions about securing and spending working capital against that plan.

If you don't have a clear vision, a well-constructed plan, and well-defined goals, you can burn lots of cash going down blind alleys and chasing false opportunities. That can cause you to loose credibility with your lenders and investors. Or even worse, lose your shirt!

When you need additional capital, know how much you need and exactly how you're going to use it. With every trip to the well, you may have to pay higher costs in terms of -

• Equity dilution.
  
  
• Additional personal guarantees.
  
  
• Additional debt service costs.
  

Conserve your cash. If you don't, the day may come when you can't get any more.

Evaluate non-revenue-based activities most critically.

It's relatively easy to calculate the return on investment for things such as new machinery or raw materials that you'll use within thirty days to manufacture products and generate sales. It's much harder to evaluate the ROI for overhead expenditures, such as information systems or employee benefits. But you still need to do it.

For example, suppose you're considering investing in additional employee benefits with the goal of reducing turnover. Do your best to assess the recruiting, retraining, and other costs associated with turnover. Then project how much reduction in the turnover rate you can realistically expect as a result of the proposed new benefits. Finally, estimate how much money the reduced turnover will save you and calculate your ROI.

Look inside your organization for cash before you look outside.

Seek to free up working capital by -

• Reducing inventory: Inventory is cash on your floor. Even asset-based lenders generally won't loan you more than 50 percent of the value of your inventory.
  
  
• Reducing rework and scrap: These soak up cash for materials and labor, but they generate zero sales.
  
  
• Retraining or dismissing underachieving employees: The investment for underperformers is about the same as for high producers, but the return is far less.
  
  
• Increasing quality: This frees up cash by reducing the amount of rework, scrap, and customer returns.
  

We've all heard the expression "Cash is King." That's even truer when you don't have it and someone else does.

Over the years, I have gained (with considerable pain) a greater understanding of and appreciation for the real cost of money. One this is certain,

The golden rule: "He who has the gold makes the rules."

Martin Harshberger is Managing Partner of Measurable Results LLC. Marty specializes in strategic planning, pre- and post-merger integration, as well as business process improvement. He can be reached at 662-844-9088 or by email at: [email protected]. His new book Bottom Line Focus is available on Amazon and his website: http://www.bottomlinecoach.com/.