Companies Should Press Banks on Helping to Generate Internal Cash

Small businesses and mid-sized companies struggling to secure credit due to the lingering effects of the economic recession should be exploring alternative methods of generating critical cash. In particular, as a new report from Greenwich Associates explains, executives at these businesses should be pressing their banks for help in freeing up internal cash by more effectively managing their working capital.

“Executives of companies that find themselves unable to obtain or renew lines of credit are not out of options,” said Greenwich Associates consultant Pete Garrison. “If working capital is effectively managed, it can significantly reduce a company’s borrowing needs. Some banks are actively advising their clients on optimizing their cash flow. Business owners and CFOs [chief financial officers] should be asking their banks for advice and best practices on this topic.”

Credit Conditions Not Improving

The results of the latest Greenwich Market Pulse show that, despite government efforts to stimulate lending and a run of strong equity market performance, there has been little improvement in credit conditions for small businesses and mid-sized companies over the past 12 months.

Six times per year, Greenwich Associates surveys approximately 500-700 small and mid-sized businesses across the US about their banking relationships. Included in those surveys is a simple question: is it getting easier or harder for your company to get credit? Although the proportion of small businesses that report having borrowed money over the past three months increased to 46% in 3Q09 from 37% in 2Q, 86% of small businesses participating in the most recent Greenwich Market Pulse say it’s getting more difficult for them to secure credit, as do 65% of mid-sized companies.

The Greenwich Credit Availability Index is created by calculating a net score across companies reporting that credit conditions are improving or deteriorating. “The Index for small businesses has been declining all year, and it dropped off sharply from the second quarter of 2009 to the third,” said Greenwich Associates consultant David Fox. “This is an ominous sign for the pace of economic recovery.”

Although credit also remains scarce among mid-sized companies, a levelling off of the Greenwich Credit Availability Index suggests that credit conditions have at least stopped deteriorating in this segment. After declining from 1Q to 2Q, the Index for mid-sized companies stabilised and even increased slightly during the third quarter. “Nevertheless, the Index remains deep in negative territory, indicating that a significant proportion of mid-sized companies in the US still say that it is getting harder for them to find the credit they need to run their businesses,” said Greenwich Associates consultant Jesse Neumyer.

Alternative Sources of Cash

For companies hurting from the extended credit crunch, internal funding could be a critical – and often overlooked – source of cash. In October, consultants from Greenwich Associates joined Carlos Evans and David Trotter of Wells Fargo in addressing participants at the American Banker Middle Market Banking Symposium on ways that Wells Fargo and other banks are helping companies navigate today’s difficult credit conditions. The group explained how companies can tap internal funding by more effectively managing working capital. “It is not uncommon for companies to generate savings of 10-15% simply by utilising better treasury management services provided by banks,” said Greenwich Associates consultant Chris McDonnell. “In many cases, companies have found themselves able to generate the cash they had hoped to borrow through improvements to their working capital management.”

“Wells Fargo Commercial Banking is actively looking to grow our lending to companies above and beyond the more than US$547bn of new credit that we’ve extended to businesses and consumers through the third quarter this year,” said Carlos Evans, Wells Fargo Eastern Commercial Banking executive vice president. “While loan demand from firms is starting to show signs of improvement, we still hear from companies that they are being cautious about seeking credit until they see signs of sustainable economic improvement, and we are working with those companies to find creative ways of generating cash.”

In addition to continuing vigorous efforts to secure credit, executives of small and mid-sized companies should be questioning their bank relationship managers about their capabilities in this area. Bank relationship managers need to provide constructive advice during these difficult times. Business owners are facing unprecedented challenges and need help thinking through complex options. If companies are turning to their bank relationship managers only for credit, they might be missing out on insight and capabilities that can make a real difference in these tough markets.

Between 25% and 30% of small and mid-sized businesses have switched banks in the past year, and 60% of all companies are actively seeking new banks or would be open to switching banks if presented with a compelling offer. This share is up from 40% of small and mid-sized companies in the second quarter.


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