Read more about this book.

The authors assert that change will be driven by the significant shift in the ownership of public companies. They point out that as recently as 1970, the market was controlled by a small number of wealthy individuals. Small investors owned just 19% of stock. Today, more than 50% of the U.S. market and more than 70% of the UK market is controlled by institutions investing the money of regular people. This trend has been steady over the past few decades.

How will this change the markets? If you own diversified portfolios rather than individual stocks, the authors assert, you will have a greater interest in the health of the system. Does our current crash prove them wrong or show us the pattern that will emerge after we get through these tough times?

Read more about this book.

Some businesses are trying to avoid banks that took TARP money, not wanting their fate to be in the hands of the government overseers (as Northern Trust learned this week with the flap over the sponsorship of the PGA tournament in Los Angeles). If your business needs a multi-million dollar loan facility, working with larger banks may be unavoidable. But if your loan needs are smaller, you might be better off looking at community or medium sized banks that rejected the government’s funding offer.

Also, owners should consider other forms of capital, such as injecting more equity or shareholder loans, as well as better trade terms from suppliers.

Business owners should become accustomed to the idea of more collateral needing to be pledged, higher rates and fees, requests for personal guarantees from the owners and tighter covenants. At all costs, loan defaults must be avoided because banks will not show much appetite to forbear. If your company’s revenues are declining, you must be ruthless in cutting costs in response (or in advance) to avoid this possibility.

At some point, from the lessons learned in Argentina, it is likely that inflation will return to the U.S., and business owners and investors will need to be ready to adjust their financing practices. However, at least for the near term, Fed chief Bernanke has downplayed the threat of inflation.

Today’s lending environment in the U.S. isn’t quite that bad, but it also bears no resemblance to that of a couple years ago. If businesses can find loans from banks these days, the loan rate and fees are higher. The covenants and advance rates are also tighter, a far cry from the “covenant-light” loans that were made in 2005 and 2006.

The capital injections by the Bush and Obama administrations have averted a total meltdown of the U.S. banking system, but have created some “zombie” banks by deferring their inevitable insolvency (liabilities exceeding assets, exacerbated by declining asset values). The injected capital has supported some key internal ratios, but no conditions to lend were attached, so the funds did not create much market liquidity.

So who’s lending? Let’s look at eastern Massachusetts, where I spoke with some bankers off the record this week.

The lenders who are booking new lending relationships are re-financing relationships that exist at other banks. There is little expansion of lines of credit. There is no merger and acquisition activity.

At some of the biggest banks in the area, here’s what we’re seeing. B of A is in the papers every day because of the disastrous acquisition of Merrill Lynch. An explanation of their lending approach in the lower and middle market is that the Bank would lend, but there is concern about the credit quality of the borrowers—so not many loans are being made there. Citizens just announced huge losses for the last quarter of 2008 and for the year as a whole. Sovereign was recently acquired by Banco Santander from Spain, which is now instituting tighter credit standards and overhauling the culture, making its lenders more cautious. And TD Banknorth appears to be the most active in lending at that end of the market, but can be selective when reviewing credits from these other banks.

One tier down, Middlesex Savings Bank and Eastern Bank seem to have avoided the toxic assets found at B of A and Citizens and are lending more aggressively, albeit selectively. Even in this sector, banks are establishing higher floors to loan rates, requesting more security, and tighter covenants.

Even mezzanine lenders, who were shut out when senior debt lenders were making more aggressive loans a few years ago, are getting involved—in response to the request by senior lenders to have more capital.   Mike Oleksak   2009

Getting deals done in banking ultimately depended on your ability to get a proposed deal approved. Approval hinges on acceptance of a written presentation of the deal. This meant that when I was a banker, my ability to package the compelling aspects of a deal while still addressing all the potential risks was the critical real-time test of my thought leadership. Over time, I also found that as credit officers came to know the work that my peers and I did, our ability to get deals done was enhanced.

When I worked at Citicorp, expertise was recognized through an international register of credit approval authorities. Sign-off was often required from officers with special approval powers for specific industries or markets. They earned these powers through their experience but also through writing briefing memos, structuring guidelines or guidance documents that would be used throughout the huge international network that existed at the time in Citi.

Wherever you work, there probably is a similar dynamic going on. It may not be as formal as in banking or consulting; but in any job, you ultimately earn your credibility— and your ability to do business—through the development and packaging of your ideas. Read on for some ideas from Michael on how to accomplish this. -Mary Adams  2007

This is a very helpful book for owners and advisors to “gazelles”. To read more about this book, visit the author’s web site.

A Business Plan is really a marketing document for a company as a whole. It is used to present the company to an external party such as a lender, investor or potential M&A partner. One client of ours used the plan to raise money and then updated it slightly a couple years later to sell the business.

A good Business Plan is exciting. It reflects what is unique about the company and helps the reader understand its future potential. That is not to say a Business Plan can ignore the weaknesses of a company—in fact, a good Plan will disclose the weaknesses together with context and a discussion of how the weakness is being addressed.

We always try to find a special “hook” for a plan, a memorable explanation of the company’s business model or offering. A graphic is the ideal way to make an intangible like strategy more tangible to the reader.

The creation of a good Business Plan takes time. We would never advise a company to invest in this document just in case they have a need for it. But if there is a pretty good chance that you will need to raise money or attract partners in the future, start preparing now by keeping a file of stories that express who you are as a company, data that gives perspective on your market, and documents that will help paint a picture of the great opportunities that await your company—and, by extension, your potential partners.

For this reason, it’s always good to be ready for the worst with your bank. If the bank calls a loan or cancels a line of credit, do you have a “Plan B”? Do you know what you would do? Here are some points to consider:

1. Keep your current bank well-informed. Bankers hate surprises. For the relatively small spread over the cost of funds they get on commercial loans, they cannot take big risks. If they know how your business is doing and what your plans are for the future, you are in a better position, even if you have a hiccup.
2. Know your backups. Are there banks who have been trying to make appointments with you or your CFO for awhile? Take the time to see them! It will be much easier for them to have confidence lending to you if they know you already…especially in a down cycle.
3. Watch your cash position. Keep a close eye on your cash reserves and accumulate cash if you can. Postpone capital expenditures and reign in spending where possible. Conversely, if you are flush with cash, a downturn is the best time to pick up assets or companies/competitors at bargain basement prices.
4. Keep an eye on the credit markets. Find out if your bank is pressuring corporate borrowers to repay because they may have their own capital issues due to the sub-prime mortgage mess.
5. Know where you can go for liquidity. There are distressed lenders, receivables lenders, factors, and government programs that can help companies in a pickle.
6. Have a Business Plan ready in case you have to go to market. See the Industry Snapshot for more details.

- Michael Oleksak     2007