Viewpoints

How Your CPA Can Help You Through the Credit Crunch

Jeff Lewis

It's a new age for commercial lending, as banks tighten standards and scrutinize loans more than ever. However, your CPA can help.

The current credit crunch was fueled primarily by poor management of credit on the part of borrowers and loose credit policies on the part of lenders. Lenders made a staggering amount of loans backed by inflated real estate markets. As real estate markets collapsed, loans went bad, and lenders took the hit. In response, lenders began hoarding cash and tightening credit policies, resulting in a reduction in the supply of credit in the face of high demand. The actions of lenders in these markets have rippled through the entire industry.

However, every cloud has a silver lining: Banks still have money to lend, and interest rates are at historic low. For any business applying for a loan in the current environment, it helps to review the "five C's" of credit analysis:

• Capacity to repay is the most critical factor. A prospective lender will want to know exactly how you intend to repay the loan.
• Capital is the money you personally have invested in the business and is an indication of how much you have at risk should the business fail. Lenders are more willing to lend if they are not the only ones with “skin in the game.”
• Collateral or guarantees are additional forms of security that you can provide the lender. In this environment, they will want to know they are protected if the business is unable to pay.
• Conditions focus on the intended purpose of the loan. Obviously, lenders want to know why you need their money.
• Character is the general impression you make on the prospective lender. Even though they may be loaning funds to the business, they want to make sure that experienced, trustworthy individuals with solid references are at the helm.

In this market, the advantage lies with conservative, well-run businesses. With tighter lending standards, there are fewer “good” lending opportunities. Banks will compete (sometimes aggressively) for loans to companies with strong balance sheets and positive lending histories. Due to the fact that CPA’s often have strong relationships with a multiple lenders and significant experience with various transaction structures, CPA’s can shop your loan to multiple lenders and create a situation in which lenders compete for your business. In addition, your CPA should be involved in negotiating the structure of the transaction to ensure that levels of collateral are reasonable, personal guarantees are minimized, and covenants are structured in a way that the business will not have to struggle to meet them. It’s appropriate for the lender to use covenants to ensure the business lives up to its end of the bargain, but it doesn’t do anyone any good to set covenants that the business is unlikely to meet.

Unfortunately, not all of the businesses looking for loans fall into the “conservative, well-run” category described above.If you are one of them, your CPA can help.

In the past, copies of tax returns and internally prepared financial statements may have been all that was required by the lender, depending on the dollar amount of the loan and the lender’s perceived risk. In the current environment, lenders that used to require internally prepared financial statements now want compiled or reviewed financial statements; those that used to require compilations or reviews now want audits. If you’re considering borrowing in the current environment, talk to your CPA about the level of assurance on the financial statements that lenders will probably want to see and be proactive. The more assurance your CPA provides, the greater level of comfort the lender will have with the numbers. Better information lowers perceived risk, which could result in a lower interest rate.

If your business is struggling, talk to your CPA about ways to make your business more credit worthy - strengthen your balance sheet, cut costs, and employ other measures to make your business more attractive to prospective lenders. CPA’s work with a number of different companies in a number of different industries; use their experience to your advantage. Although changes typically don’t occur overnight, your CPA can help you implement a plan to get you where you need to be. Even if you’re not looking to borrow funds, these activities can often help achieve your business goals and maximize profit.

Disclaimer: The Bonadio Group provides the information in Viewpoints for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in Viewpoints are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.