If you have small-business clients, they may be desperate for cash right now — or worried about having enough cash in the coming months. With the government's mid-October announcement that it plans to take stakes in the country's major banks, credit conditions showed signs of easing for the first time since the summer. But economists predict it could take months, if not years, for lending to return to healthy levels.
Way back in February, small businesses were already feeling credit pain. A National Small Business Association survey conducted that month found that 67 percent of small-business owners have been affected by the credit crunch, while one-third reported deterioration in the terms of available bank loans. The millions of business owners — and their customers — who rely on credit cards, meanwhile, are not faring any better. The most recent Federal Reserve Bank Senior Loan Officer Opinion Survey, conducted in July, found that 65 percent of banks have more stringent lending standards, 47 percent have tightened terms and conditions on new or existing cardholders, and nearly 40 percent have increased credit card rates.
Cover Your Ass(ets)
To help your small-business clients protect their cash, it's key to be aware of FDIC-insured limits, which were recently increased as part of the “bailout” bill from $100,000 to $250,000 per depositor through 2009, says Matthew McGrath, chief planning officer with Evensky & Katz Wealth Consultants, a Coral Gables, Fla.-based financial advisory firm. McGrath is encouraging clients whose bank deposits exceed the limit to disperse the funds using instruments called Certificate of Deposit Account Registry Service, or CDARS. In essence, funds are placed in FDIC-protected CDs issued by a network of banks so that each one qualifies for the insured limit, and the clients can conveniently access the money through one account.
“Cash flow is particularly critical for small businesses,” says McGrath. “They can't afford not to have access to their money if a bank is seized. That could be catastrophic.”
The likelihood of more banks being seized has diminished somewhat with the government bailout bill, but there is no point in taking avoidable risks. Experts agree that financial advisors with clients who have a bank credit line, home equity loan or other covenant that's used to help finance the business should review the fine print to fully understand their rights and terms, says McGrath.
It's also wise to visit the local banker and ask questions about the status of the agreement and whether the lender may be reviewing and/or adjusting the terms, especially if you are close to a renewal date, says McGrath. A local banker may also have some insight into upcoming institutional changes or types of businesses they may be scrutinizing. And they may be open to negotiating terms, says Jeff Fishman, president of Los, Angeles, Calif.-based JSF Financial, rather than risk a customer default.
Lowenberg believes now is the time for those clients who are fortunate enough to have credit lines to hoard some money before banks have the chance to reign in limits. He believes the benefits of stashing some cash certainly outweigh the costs. The terms can change for the worse if the client's balance sheet changes dramatically, or if the banker who understands the business loses his job or moves on, he says.
Seek Alternate Sources Of Capital
Finding new funds these days among strapped lenders may be akin to panning for gold. But look for local and commercial banks and credit unions that maintain strong short-term ratings. These banks want to stay in business and there are only two ways they can do that: Collect deposits and make loans, says McGrath. The key for advisors is developing strong banking relationships, and making sure clients have up-to-date cash flow statements and other supporting financial documents.
Fishman, for example, has gained a new appreciation for the relationship he cultivated with a local Wells Fargo banker, who recently helped one of his clients obtain an SBA loan for a few hundred thousand dollars.
Helping clients keep a handle on expenses is critical, says Howard Hook, CFP, CPA, Access Wealth Planning headquartered in Roseland, N.J. “People tend to ignore rising costs when things are good.” If they come up short, they may well have to tap their own accounts. For example, a client was struggling to fund a pension plan. Hook helped her take a distribution out of a personal IRA and loan it to the company so that the obligation could be met.
But if your client can't get a bank loan, and can't find anywhere to cut costs, there are other options. As credit markets have seized up, an increasing number of private, non-bank lenders are quickly gaining popularity. Peer-to-peer or person-to-person (P2P) lending networks in which people lend others money directly online, without the involvement of a financial institution, are a possible alternative. A study released by Celent, a national research and financial consulting firm, predicts the peer-to-peer lending market will grow a staggering 800 percent by 2010. Websites like Prosper and Zopa report typical loan amounts range from $8,000 to $20,000. Lenders on the sites usually decide whether to lend money to a particular borrower — and at what rate — based on the borrower's credit score and existing debt.
But in mid-October, even these sites seemed to be feeling a squeeze from the credit crunch. According to reports, Prosper and Zoba were forced to temporarily suspend lending. Meanwhile, websites like Virgin Money professionalize the process of borrowing funds from friends and family. Merchant cash advances are another option advisors recommend as somewhat of a lender of last resort. In essence, they give cash in return for a percentage of future credit card sales. However, interest rates can be extremely high, so it should only be considered for a short-term fix.