Raising credit in times of hardship

When there’s a downturn in the economy, as we know from previous economic crises, banks in particular start to tighten their belts. The current crisis, which is affecting most financial institutions, is making banks even more tight fisted. Margins have shot up and lots of banks are doing their level best to hand out less credit. As a result, companies are finding it more and more important to find the right strategy in dealing with banks. The finance experts at the Frankfurt-based Steinbeis Consulting Center for Medium-Sized Enterprise Finance and Investments have worked out and used successfully a number of ingenious approaches in recent years that are useful to owner-managed and listed companies in all sectors of industry.

“No, we’re not issuing guarantees and we’re not prepared to make any more commitments.” When a Steinbeis customer – a medium-sized enterprise from North-Rhine Westphalia – heard these damning words, the experts took it upon themselves to lend a helping hand, provide professional support and work out an alternative financing plan.

The tooling technology company makes around 50 million euros a year and is profitable. It needed around four million euros for a sales and production investment. When the company’s main banking partner turned it down, the experts at the Steinbeis Consulting Center for Medium-Sized Enterprise Finance and Investments rolled up their sleeves. First step: intensive discussion with management culminating in a financial rating based on the current standing of the company.

After examining company finances, they had a clear picture of the actual amount of finance needed and how much credit the company could afford to take on. But first it had to improve its working capital. The experts identified and approached another bank which would work alongside the existing bank to provide extra funding.

Only 10 weeks later the Steinbeis customer received a line of credit from another bank and a medium-term loan amounting to 4 million. Interest was around 2.5 per cent under the average bank lending rate for a similar term and arrangement. The banks had previously insisted on the directors acting as personal guarantors but now they could be convinced to issue their own guarantees and adjust their credit rates downwards.

Now, during an important phase of market consolidation, the company has the extra finance to expand and build its market share at home and abroad. The directors are no longer tied into personal guarantees.

The Steinbeis financial experts’ final assessment is that, given the overall situation, banks will probably remain reluctant to extend existing credit agreements with companies – or issue new credit – well into 2010.

To make tangible progress and improve their financing, companies must analyze the figures in detail and be able to negotiate with banks on the same level.