With the credit crunch and the lingering after effects, we’ve seen many banks essentially change the rules regarding who they will extend credit to, granted this was needed as many institutions had gotten away from the conservative underwriting that has made banking a safe and profitable business for many years. Most small companies realize that banks have become less of an option for credit, but we’re also seeing them change the rules on venture backed companies.
Before the credit mess, if you had substantial venture or angel backing, you could more easily obtain credit lines from banks, especially if they concentrated on your industry.
But now, with the more conservative lending practices by the banks, they have reduced and cut credit lines altogether if you don’t fit their lending model any more. In other words, they look at your historical performance only, and if you’ve lost money, regardless of your capital backing, you’re in danger of having your credit lines reduced altogether.
In reality, this is probably what we want from our banks and financial markets. They are not in the business of risk taking and writing off bad debt, which is what got us in the trouble we’re in today.
However, companies need credit lines and cash flow to meet payroll, make expenditures, etc. So if the banks aren’t an option, where do you go if you don’t want to dilute yourself any further?
This is the situation that one of our Austin-based companies found themselves in this year. Their bank determined that they no longer qualified for their $400K credit line, and they had to search for new credit options.
Where a bank only looks at historical performance, we were able to negotiate a credit line based on future performance and accounts receivable performance without diluting the shareholder’s equity stake in the company. And, because we looked at their accounts receivables, we were able to extend $1M in credit.
The point is that there are options out there to gain the credit you need to operate your business without raising more capital and diluting your equity stake or being forced to slow your growth because of inadequate bank support.