The Buzz with William McDevitt of Chevy Chase Bank
Tell us about Chevy Chase Bank’s Mission
Over my last 25 years serving small to emerging middle market businesses, the last 14 with Chevy Chase Bank, I have realized two constants among business owners. They want access to their banker and they want their bank to be an advocate for their business. Chevy Chase Bank demonstrates and differentiates its commitment to customers by delivering on this message. By embedding ourselves into our local communities, making local credit decisions based on local market knowledge, and telling our story, face to face, one business at a time, we provide access and advocacy to our customers everyday.
How has the current economic environment impacted entrepreneurship?
Let me start by saying that the many business owners with whom I have had the pleasure of doing business won’t allow much to stand in the way of their goals. This is core to the entrepreneur state of mind. My optimism for our ability to not only survive these economic times, but thrive again based on what we will have learned is based on my confidence in the resourcefulness of our small business owners. These are some of the most practical, tenacious and resilient people I know. These are the qualities that will see a small business owner through these uncertain times.
According to an August 2008 survey by the National Small Business Association, 67 percent of small business owners are affected by credit tightening compared to 55 percent in February 2008.
So, is this perception justified? I think that it is and I believe that credit will remain tight through 2009 as banks respond to the performance of their small business loan portfolios. Many banks have begun to review how they make decisions about small business loans. Some that were relying purely on credit scoring models may lower their loan amounts that are decided this way to reduce risk or raise their minimum scores. Others will add a more judgmental component by asking more questions and requiring additional collateral, time in business or net income before making their credit decision.
For businesses, there are two sides to this credit crunch coin; the businesses that already have a credit facility and those that want one. If you already have a credit line from your lender, then, depending on their portfolio review policies and your company’s recent performance, you may be contacted by your lender. If your business has lost money or if you have a line of credit that has been “maxed out” for an extended period of time, you may be asked to pay down, term out or payoff your line of credit. Try to keep your balances revolving on your credit facilities and most importantly, be proactive with your lender by communicating how you plan to address any cash flow issues that may have surfaced over the past year. You’ll be amazed how far that goes in working with your lender. If you are looking for new credit, the “back to basics” approach banks are taking is described under the next section. Be prepared to bring a little more to the table.
How will all this affect your business? To put it in terms to which we can relate, there is a financial flu virus spreading out there and it’s attacking the immune systems of our small businesses. Like catching a cold, our businesses will react in different ways based on their genetic makeup; i.e. industry, personal and business debt, cash in the business, health of suppliers and receivables and of course, the depth of the owner’s pockets. How badly your company is infected depends on how well you take care of your company’s immune system. So what can we do to protect ourselves from the “crunch”?
What factors should small businesses consider to shield themselves from the existing credit crunch?
To carry the cold analogy a bit further, the best defense from getting a cold is taking care of your company’s health.
– Watch what you eat (Discipline your spending)
– Exercise and stay active (Smart marketing and networking)
– Take vitamin “C” – but don’t overdose (Manage your credit)
Your lenders are getting back to lending basics. Remember the 5 “C’s” of credit? They’re back. Character, Capacity, Collateral, Capital, and Conditions. Let’s take a brief look.
Character This is a mouthful. Your personal credit score, your willingness to personally guarantee the loan, your experience in the business, your preparedness and knowledge of the industry, quality of financial statements and your personal integrity. Some of these characteristics your bank will already know and some you will have to demonstrate.
Capacity This is the primary source of repayment the bank looks to when calculating your ability to repay the loan. You need to show profitability for more than one year at a level that will cover the payments for the money you want plus the debts you already have. These formulas can vary, so ask your lender what they are looking for as minimum debt service coverage.
Collateral This is the secondary source of repayment the bank looks to for repaying the loan in the event that there is a default and you are not able to repay. For loan amounts generally over $50,000, be prepared for your lender to look for both personal and business assets you own to secure the loan.
Capital Just like equity in your home, this represents the amount of equity in your business. Think about the value of the tangible assets you have on the books (i.e. cash, equipment, building, receivables, etc) less what the company owes. The more positive that difference, the better.
Conditions The lender will look at your industry and other economic factors at play that may affect your ability to sustain your business. Be prepared to discuss how your business has responded or plans to respond to recent changes in your industry.
As with any business, there are things you can control and some things you cannot. Focus on the things you CAN control. Don’t let up on your business development activities. Stay visible and market yourselves smarter not necessarily harder. Who are your customers? Are you “shot gunning” your marketing efforts or are you being more surgical in your targeting? Balance your outreach and the cost and effectiveness of that outreach. This will help your dollars spent to new customer expense ratio.
But don’t forget to watch what you eat!