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Banking And Finance
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The Right Fit
TAYLOR: There’s opportunity out there for small businesses to refinance their long-term capital assets now at extraordinarily low rates. If they got a loan almost anytime in the past, they can get a lower rate now, and so there’s an opportunity to do that. Of course, if they’re smart businessmen, they want to lock in that rate for a period of time going into the future. Then that creates interest rate risk for those of us financing that.
The larger banks have had ways to hedge against that interest rate going forward. Smaller banks have just used their liability structure, their deposit structure to do that. And the smaller banks have to get more creative and more innovative to be able to compete in that market. There is a market out there to help our customers take advantage of an opportunity with the low rates.
What advice do you have for small businesses that are approaching the bank for loans—are there things they can do to enhance their ability to get financing, particularly at attractive rates?
HOWELL: It’s really critical for them to develop a good relationship with their banker. The banker understands your business. He understands what you’re doing. And when that relationship develops, then you’re able to get loans and they can help counsel you to get the better rate, whether it’s going with the SBA or some other source to get the funding that you’re needing. When you develop that relationship, then you can work through the good times and the tougher times.
STILLINGS: And along those same lines, developing a relationship always also means being totally up front. We all know that surprises are very difficult. But some of our small business clients don’t want to volunteer the information. They don’t want to tell—even if it’s good—how good it is and how bad it is.
It’s the information that we get on a regular basis that allows the banker to really be of value as opposed to sitting there waiting for the client to come in and ask for a loan at some point. We should have already developed that relationship and have a pretty good idea of how the business is doing because of the open interchange that we’ve had.
BEARD: If this has any kind of a real estate component, I think a lot of borrowers haven’t realized just how much damage has been done in that area and how the appraisal plays into it. So they’ll get an appraisal on a thing that they think is worth a million dollars, and it comes in at $600,000. There’s a tendency to think, well, the appraiser’s wrong. And the appraiser may be wrong. But there’s not an understanding of how appraisals work and how the bank has to deal with the appraisal.
Borrowers need to be realistic. They need to understand there has been damage done to some of these values and that that’s part of the reality of where we’re at. If they can understand that and factor it into their request and talk to their banker, they can work with that.
But if it becomes adversarial—the bank’s wrong and the appraisal’s wrong and I’m going to go find another bank—that’s a damaging thing to that small business borrower.
MORRIS: Real estate development transactions for the small entrepreneur are going to be harder to pull off. Typically they’re promoters. They use other people’s capital for the equity. They patch together architects, attorneys, land planners. And from a project-analysis standpoint, it might pencil, but from an execution standpoint and the ability to run the asset when it’s completed, long term, that’s just going to face a lot more scrutiny.
DeFRIES: Many entrepreneurs really think they understand what their business can do, and they have a whole set of expectations for taxes or for an incentive that they’re trying hit or a contract that they’re trying to hit. We’ve found it very commonly gets confused as opposed to just a really standard set of good financial reporting packages. A small business borrower should be able to understand and quantify what those financials are and what the revenue recognition is in his industry.
We have a couple situations where it’s not really very well known what the revenue recognition is for that industry, and if the operator doesn’t know it at all, they haven’t even consulted with anybody on whether it really makes sense, it’s really hard for us to make those same determinations when they don’t even start with a basis.