The Downturn’s Silver Lining for Small Busines
By Chris Lehnes, Vice President of Business Development,CIT Bank - Small Business Lending.

As the economic slowdown poses daily challenges for businesses across the country, virtually every eye is watching to see how a combination of widespread cost-cutting measures, lowered interest rates and consumer confidence will ultimately impact the nation.

For small businesses, the downturn doesn’t necessarily mean bad news. In fact, it can actually help some companies grow stronger. The key is to take an objective step back and assess your current operations realistically. Considering that a small business is often thinly staffed and every spare minute is spent handling the numerous demands that occur throughout a typical day, a forced breather resulting from a slowdown gives you time to evaluate your situation.

Once you have a clear picture of where your business stands, you can then look for and capitalize on a wide range of opportunities. These may include building on your strengths, addressing areas of improvement, taking advantage of favorable interest rates and putting plans in place to solidify your company’s future.

The economic slowdown may be an ideal time to tap into the power of financing. Whether your business is thriving or having a flat year, your assessment process should include a look at financing options that could help your company become stronger.

If your company is going through a difficult business cycle, for instance, this may be the perfect opportunity to refinance your debt. Loans with high interest rates or balloon payments could be spread over a longer term, reducing the monthly payments.

Another smart approach in tough times is to focus on eliminating excess, whether that means cutting the least profitable product lines, trimming extra staff, or controlling expenses. But while cutting costs makes sense, be sure to cut the right things. For example, you may want to look at eliminating an unprofitable business line or product, but cutting technology dollars may be cutting an investment toward efficiency. If you reduce your budget in this area, you may be limiting your competitive advantage, and that could hurt you in the long run.

On the flip side, you may find that the downturn has caused your business to pick up. One inherent strength that small businesses can leverage in sluggish times is the agility to respond quickly to changes in the marketplace. As large corporations rein in their resources, small businesses have numerous opportunities to pick up the slack, providing outsourcing services for their larger counterparts or stepping up services to customers who may be receiving less attention from other companies with pared down sales forces.

If your business is experiencing an upswing or has been successful on a steady basis, now may be the time to plan an expansion—through resources, staff, real estate, or perhaps adding a new location. Even if you’re not ready to expand or make improvements at this time, today’s economic environment allows you to lock in highly favorable interest rates and term provisions for financing down the road.

As you assess your situation and prepare to capitalize on opportunities, you should have a financing partner at your side who can offer you solid advice and help you achieve your goals. Good advice is always timely, no matter what state the economy is in, and a strong relationship with financing experts will help you develop programs that make sense for your business.

Many considerations should play a role in your choice of a lender, so make sure you find a financing partner that best suits your needs. Non-banking companies like CIT Group Inc. can be particularly beneficial in a down economy because they specialize in loaning money to small businesses through all business cycles, while traditional banks must often adhere to more stringent lending criteria when capital is tight.

If your business has had an off year, you may find a non-bank is still willing to work with you as long as your company’s financials show a trend of controlling expenses and managing the business through difficult cycles. Specialized lenders also have the expertise to get a loan done specifically for small businesses, even if your company is low on collateral or is dedicated to a single use (i.e. gasoline service station)—which more traditional lenders might shy away from.

A traditional bank might also require you to use their other products and services, such as business or personal checking accounts. In such cases, a small business loses flexibility. A non-bank lender generally has no interest in these other lines, allowing you to maintain credit cards, car loans or 401(k)s, for example, from the "best of breed" options in the marketplace, rather than being tied to one resource that may be less competitive.

Aside from flexible financing and credit requirements, you should also look for other qualities in your financing partner, including:

• A network of responsive and knowledgeable representatives with local and national resources.
• A strong track record in assisting small businesses.
• Online services to speed up the application and funding process.

A recent CIT SBLC transaction paints a clear picture of how the right financing partner can make a difference. Last fall, South Carolina businesswoman Linda Black wanted to purchase a building for her company, Clean Advantage Inc. While several banks and financial organizations were eager to offer funding, Ms. Black was looking for a lender who could provide a comprehensive financing package, which included real estate, equipment and working capital, all in one loan. Because of CIT SBLC’s specialization and broad scope of services, Ms. Black chose CIT SBLC to handle the entire project.

CIT Bank - Small Business Lending representative worked hand-in-hand with Ms. Black, walking her through the application process, helping her structure the loan and bringing the deal to a successful close, even making sure the appraiser showed up on time. Within four days of her application, Ms. Black learned she would receive the funding she needed to grow her business.

Once you’ve looked at the big picture, focused on areas of your business that need attention, and selected a financing partner, you may find that a Small Business Administration (SBA) loan will help you finance the ventures necessary to make your company stronger. These loans may be used to purchase or expand real estate, buy a business or franchise, purchase machinery and equipment, improve leaseholds, refinance certain existing business debt, and provide working capital in conjunction with any of these efforts. An SBA loan offers competitive rates and longer terms than a traditional loan. In addition, these loans have no points and no balloon payments.

You can obtain SBA loans and other financing sometimes in a matter of days. As the leading SBA lender in the nation, CIT Bank - Small Business Lending enjoys preferred lender status and thus has the authority to make credit decisions on behalf of the U.S. government, processing loans ranging from $50,000 to $3 million more quickly and efficiently.

If you decide to apply for a loan, be prepared to provide three consecutive year-end tax returns, financial statements and interim reports (see sidebar). This information will be reviewed to determine available cash flow trends in assets, liabilities, working capital, total debt and net worth. If your company does not have a three-year track record, exceptions may be made if you have a fair share of unencumbered assets and can measure how well your business is doing.

In addition to your company’s financial track record, lenders will put your management team under the microscope as well. Influential factors might include industry experience and reputation, how much equity senior management has in the company, due diligence on competition and potential improvements, and if you have a complete grasp on every aspect of the business. A solid credit history and personal guarantees are also important to close the deal.

As you make improvements and get your financial house in order, you should also make sure you have a clear succession plan in place. Your business should have a plan that spells out who will take control of the company if something happens to the current owner or if the owner retires. This is just as crucial to the future viability of your company as any of the other strategies we’ve discussed.

Speak with your advisors to determine the appropriate steps to take ahead of time that will facilitate succession when the time comes. Controlling your taxes is an important aspect of any exit strategy, and you will also need thorough and straightforward documentation, reflecting the time period where your business has been in good stead. Also keep in mind that the best time to sell your business is generally when your company is on an even keel, not going through a growth spurt. While growth is important, a buyer is often more interested in seeing consistent performance over a few years and a strong track record.

Now is the time to take a hard look at your business and implement strategies that often fall to the wayside during times of brisk activity. Once these strategies are in place, your company will be better positioned to handle any business cycle—bullish or bearish—for many years to come.

Documentation that lenders will want to review includes:

• Balance sheets
• Accounts receivable and payable aging schedules
• Profit and loss statements
• Personal and business tax returns
• Debt schedules
• Operations analysis
• Business projections for the coming 12 months
• Business plan