Noteworthy

Focus on Financing:
A Credit Crunch? More Like a Credit Squeeze

Although a recent Federal Reserve survey of senior bank loan officers indicates that the credit squeeze of late 1998 has eased, lending standards remain tighter than they were last year. This simply means that banks and other lenders are carefully considering and reconsidering granting loans they would have made without hesitation in 1998. "Companies can still get access to credit," according to Thomas C. Bloch, president and CEO of the CIT Group/Business Credit, a New York-based business lender. "It is just that some money went to the sidelines" after 1998’s volatility in the domestic and foreign financial markets. "Any time there is turmoil, money doesn’t disappear, it just goes to different places," says Bloch.

Moreover, this volatility is unlikely to affect all companies equally. Few predict a credit squeeze for large investment-grade companies. Instead, small and mid-size companies are most likely to bear the brunt of this squeeze by "having to search longer for money, pay more for it, and be prepared for more stringent terms and conditions," says Bloch. "This is particularly true for companies whose credit is weak or has deteriorated recently." Strong companies too may find that, even if they can obtain financing, many lenders are applying tougher lending standards and are not as willing to provide as much financing as the company needs. In 1998, a small or mid-size company making an acquisition could expect to obtain financing equal to as much as 4.5 to 5 times its operating cash flow, according to Ron Kahn, a managing director with investing banking firm Duff & Phelps LLC in Chicago. "Now tighter standards have given lenders the excuse to limit financing to about 3.5 times operating cash flow."

Plan for the Future

Companies facing a longer search for credit should begin developing relationships now to set the stage for financing that may be needed six or 12 months from now. To prepare for borrowing, it is a good idea to make sure the company’s financial numbers are solid. "Spend money more prudently to make the balance sheet more attractive for potential lenders," advises Richard Russakoff, president of Bottom Line Consultants in Richmond, Va. Lenders are also looking for borrowers that are well prepared for the Year 2000. It is important not only to show that the company is Year 2000-compliant, but that it also has the reserves to weather several weeks of inefficient cash flow if its customers are not Year 2000 prepared.

Setting the stage for future financing is particularly important for companies that are well prepared for the Year 2000 computer changeover and are looking to grow through acquisition. "The first quarter of 2000 could represent an opportunity to build up the company by acquiring Year 2000-troubled companies at ’fire sale prices,’ " says Russakoff.

— JS