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Use credit strategically as the recovery gains strength

The significant tightening of business credit brought by the recession has begun to lift, with a recent analysis of FDIC data by the Investigative Reporting Workshop finding five straight quarters of increasing overall commercial and industrial lending by banks.

As the credit squeeze eases with improving economic conditions, lenders remain cautious in their underwriting, however, even as interest rates remain at near-record lows. Consequently companies seeking to ride the recovery, as uncertain and erratic as it may admittedly seem at times in the short term, must be strategic in their use of credit.


Managing your company effectively and growing strategically as you shift from defense to offense may depend on the quality of credit you can access more than on any other factor. And this often comes down to a question of how you manage your creditworthiness before reaching out to potential lenders to finance an expansion of facilities, capabilities, intellectual property, equipment, inventory or staff. It is a good idea to start by taking a close look at the following:

  • Once you have actualized an expansion plan to achieve any of these growth measures, take a practical and honest inventory of internal resources needed to take on the additional debt you seek.
  • Review your staff resources to administer and pay back a lender, including the expertise to fulfill covenants consistently and reliably.
  • Realistically assess the cash flow your company has available to serve both existing debt and the new debt you seek.
  • Analyze your leverage ratio, before and after borrowing, as preparation for possible additional borrowing should contingencies or unexpected opportunities arise.

This last consideration deserves underscoring, and some perspective. When business credit tightened initially, many companies found they were overleveraged and had no financial cushion to ride out deteriorating conditions. When sales and cash flow faltered, their debt service became unsustainable. Ensure that your company has sufficient, and sufficiently liquid, reserves to bridge temporary short-falls.

Also, before borrowing, plan out your exit strategy, which means more than just the simple injunction to borrow only what your company can pay back. Be clear about how your company will pay back the new debt, taking into account possibilities such as appreciation in your collateral value or in cash flow, or the possible availability of a strategic take-out loan at better terms than currently apply. If your company has multiple credit facilities in place, be strategic about allocating resources to pay them down. Paying early may deprive your company of needed strategic reserves.

Finally, strategically match new credit to new needs. Review the initial purposes for which you obtained term loans or lines of credit and reassess how suitable your existing credit exposure remains in light of current needs and plans. Then choose the form of credit that best fits current conditions, your exposure and your business objectives. Work with an experienced business banker to engineer the most appropriate financing for your company’s current cash position and future plans.

Work with your banker to determine whether debt or equity is most advisable, given your ownership structure, management and business type.


Your company may have internal financial resources available for powering growth. Identifying and using those resources can extend the effectiveness of such external financing as debt.

Strategically use profits. Allocate them to those product lines, services and investments that bring the greatest return. This may sound overly conservative, and to some it may seem to preclude taking prudent risks in new product development and other initiatives. But these are times when careful resource allocation pays off.

Enhance cash flow. Accelerate income by tightening your payment policy with customers, demanding deposits or cash up front, or offering discounts for prompt payments. Consider raising prices or increasing fees¾but carefully, to preserve customer loyalty. Decelerate outgoing payments through negotiations or requesting discounts for paying promptly. Calculate and balance the value of the float against the need to preserve the good will of your suppliers and vendors.

Craft strategic alliances. Similar companies can form marketing alliances to highlight the value of their products and services, and companies can cross-sell one another’s products, enhancing the attractiveness of both to new customers.

Explore non-debt and non-equity financing. You can use accounts receivable funding/factoring, equipment leasing or purchase-order funding to raise capital; retailers can obtain cash advances against future credit card purchases.

Expand products or services. Choose expansions that make strategic sense with your company’s existing offerings.

Buy efficiency. Concentrate on your core business and outsource non-income-producing activities from your back office.

Rely on professionals. Financial and business advisors can supply the expertise your company may lack, providing guidance on expansion as the economy recovers, and how to finance it.

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Tom Spilman

Thomas Spilman is the President of KeyBank in Colorado. Tom has full responsibility for growing the client base in Consumer Banking including Investment Services and Mortgage, Business Banking, Commercial Banking and Private Banking including Trust and Investment Management.

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