Know How: Credit Crunch
Five tips on how to navigate the tightening financial markets
By Phil Worden
Special to the Worcester Business Journal
The summer of 2007 marked a pronounced shift in the credit markets. Leaving aside any discussion of the myriad factors driving this change, the end result is a general tightening in credit conditions.
Pricing of credit has risen, and investors and lenders are decidedly more risk-averse. But, this is not "financial doomsday." The change in attitude is part of the normal cycle of adjustment that the credit markets follow.
With credit tightening a reality, here are some strategies to deal with a decidedly different credit climate.
1 - Engage your lenders and other credit capital providers in an open and honest dialogue.
Discuss company strategies and plans, giving equal weight to potential problems as well as recent successes. Do this proactively, not just when there is a specific need or request. During a period of tightening credit, your bankers and capital providers will be under increasing scrutiny themselves within their own institutions. Arming them with useful information and being forthright in your dialogue will assist them in dealing with this increased oversight, while helping them continue to support your relationship.2 - Be aware of the difference between "market conditions" and "local conditions."
The term conditions represents the prevailing attitudes and practices exhibited by creditors and lenders broadly (the "credit market") vs. those evident "locally" in industry groups and local markets. There is often a lag in the credit cycle adjustment dynamics of local conditions relative to market conditions. Having a sense of where the cycle is during the adjustment process can be valuable to a borrower's ability to capitalize on the best set of credit terms and pricing while minimizing execution risks.3 - Seek the advice of a well-informed and active credit arranger.
This is particularly important if you are attempting to access multiple forms of credit capital and/or need multiple investors to complete your offering. Such an arranger will typically have the best view on conditions overall, not just the broad market or the local market. They may not always deliver the "best news" or offer the "most positive spin" on your financing request. But you should not automatically discount their message in favor of a less active arranger who at that moment may have a more positive attitude.4 - Enhance your relationship with current credit capital providers.
With credit capital less readily available compared to recent history, current credit capital providers are even more important to your business. Awarding lucrative non-credit business to the most important relationships can be an effective way of building goodwill and deepening the relationship with credit suppliers during this critical period. With changes occurring almost daily in the credit cycle, if not the economic cycle, there may come a day when you need them more than they need your business.5 - Increase your focus on managing liquidity.
You may need to review your liquidity forecasts in real time. Step up any efforts aimed at managing the level of working capital investment in the business. Keep your receivables as close to practical payment terms as possible. Ensure that inventories track sales and excess inventories are identified quickly with appropriate actions to reduce or eliminate them. Re-evaluate your capital projects.Phil Worden is senior vice president and senior business development officer of the central region for Bank of America
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