If you are a business owner, you have likely experienced first hand the effects of the embattled credit markets. In fact, a recent survey by Duke University and the University of Illinois found that 57% of U.S. businesses felt constrained by lack of credit. Taking a big picture view of today’s credit landscape there are three components creating a perfect storm for those businesses trying to access capital.
1. Fewer dollars available: There are approximately 30% fewer dollars available to be loaned out today vs. two years ago. It seems there are almost daily stories that show just how real this is. There is also plenty of objective data on this issue beyond the typical “gloom and doom” information being presented by the media. Here are some examples:
- Asset backed commercial paper: down 50% from peak
- Mortgage and loan direct mail volume is down 37% per marketingcharts.com
- Securitized debt issuance: $15B in March ’09 (with TARP) vs. $25B in March ’08, a decrease of 40%.
2. Federal Reserve rate reductions not reaching the business owner: Most business owners would say that the cost of borrowing has not decreased in the past two years. For example, per Moody’s aggregate credit card index, credit card rates were basically flat, moving from 18% to 18.5% from May 2007 to May 2009 while the LIBOR has decreased five full percentage points from 5.32% to 0.32% over the same time period.
Why is this? Some speculate that lenders are raising margins to address their problems and mitigate their risk on current and future loans. As a result business owners aren’t benefiting from the Federal Reserve’s attempt to stimulate borrowing.
3. Changes to the “prime” credit window – Two years ago, a 620 FICO score was considered “prime”; today, to qualify for a “prime” loan, a business owner needs a 680. This means that lenders think you’re a higher risk even if your FICO score is the same. With interest rates being a reflection of the borrower’s perceived risk this translates into approximately 40% higher borrowing costs for those business owners, not due to their failure to perform, but instead due solely to these market changes. Based on data collected by Direct Capital, roughly 1/3 of business owners fall into this 680 – 620 FICO score range.
The New Business Financing Reality
For now, this is the reality of the credit landscape for small business owners seeking loans, financing and business capital. Here are a few tips to combat the business credit perfect storm:
- Manage your credit profile – It is more important than ever for business owners to actively manage and build their personal and business credit. For example, a recent Direct Capital customer increased his personal credit score by 70 points in just a few weeks through some simple steps. Because of these actions, his business was able to get approved at a much lower rate and he was able to secure an additional year on the term of his lease. Without these efforts, he would not have been able to move forward in acquiring the capital equipment he needed. Small improvements can make a huge impact on not only business borrowing costs, but almost all parts of your financial life including mortgages and insurance. Just by being aware, there are ways for the business owner to make the most of their credit profile. Check out some options here.
- Know your options – Even though the cost of borrowing has been flat to increasing despite the Federal Reserves efforts, there are options and competitive rates for business owners with perfect credit to challenged credit. Direct Capital has tried to make this process easy for business owners by giving business owners access to a wide range of product types.
- Go where the money is – While financing is more difficult to get, it is not impossible. Direct Capital has secured $200 million through two separate credit facilities in the past several months and is actively helping business owners with their capital needs every day.
It can be easy for a business owner to feel helpless in this perfect credit storm but don’t be paralyzed. Business owners have the ability to overcome these factors by taking some smart and simple steps. Start with the tips outlined above.
Have you been a victim of this storm? Share your story with us, we’d like to help.
Photo credit to st3v3 at http://www.sxc.hu/photo/1225776