Obtaining Bank Loans in this Economy

Obtaining bank financing in this environment is different than it has been in the past 5 years though not impossible. Understanding how to approach a banker in this economy is crucial to success.Recently banks required 3 years financial statements, 3 years tax returns and personal financial statements in order to loan a company money. Now they are wanting much more information. They are now focusing on the soft issues; management team, marketing plan, operations, etc. They are looking for companies that have a good strategy and management team in addition to good underwriting criteria.


In addition to the Five C's of banking they are looking for companies with - Discipline- Credibility- RelationshipsWhen approaching bankers character is returning as a big factor in who they are going to loan money to.Finally, with capital so tight interest rates are not as important or negotiable for loan. At prime rate so low the interest rate is not a factor. What is important to banks and to the entrepreneur is debt covenants.Two of the most important debt covenants to banks are the ones related to cash flow and collateral coverage. These two areas limit the amount of leverage that your company can achieve.

Construction Costs Are Going Through the Roof

Recently I have been visiting with several general contracting clients regarding the challenges they are facing. Both complained of the dramatic rise in construction costs in the face of a softening economy. Over the past 6 months construction costs have been increasing 1% - 2% per month for an annualized inflation rate of 12% to 20%. These increases have made it difficult to manage the budgets for their projects. Projects that were awarded 6 months ago have seen dramatic price increases in almost every area. Steel prices, as we mentioned, have seen the most dramatic increase. In some projects the steel component has increase 50% over the past six months. But that is not the only area. Equipment rental, PVC pipe (made from petrochemical feedstock), copper wiring and other basic material have all seen increases. Finally, delivery costs to get the material to the job site have followed the price of gasoline.So how are they managing the situation? One strategy is to lock in their subs prices within seven days of being awarded the contract. One contractor notified the sub on the eighth day and received a price increase of $20,000. He later negotiated it back down to $2,000 (which he couldn't pass on to the customer.)Other strategies include negotiating price increases with customers or factoring in modest price increases in their original bid. Either way it will be interesting to see how rising replacement cost vs falling demand affects real estate values.