How Banks Help Companies Generate Internal Cash
Small businesses and mid-sized companies struggling to secure credit due to the lingering effects of the economic recession should be exploring alternative methods of generating critical cash. In particular, a new report from Greenwich Associates explains that executives at these businesses should be pressing their banks for help in freeing up internal cash by more effectively managing their working capital.
Executives of companies that find themselves unable to obtain or renew lines of credit are not out of options, says Greenwich Associates consultant Pete Garrison. If working capital is effectively managed, it can significantly reduce a companys borrowing needs. Some banks are actively advising their clients on optimizing their cash flow. Business owners and CFOs should be asking their banks for advice and best practices on this topic.
Credit Conditions Not Improving
The results of the latest Greenwich Market Pulse show that, despite government efforts to stimulate lending and a run of strong equity market performance, there has been little improvement in credit conditions for small businesses and mid-sized companies over the past 12 months.
Six times per year, Greenwich Associates surveys approximately 500-700 small and mid-sized businesses across the United States about their banking relationships. Included in those surveys is a simple question: Is it getting easier or harder for your company to get credit? Although the proportion of small businesses that report having borrowed money over the past three months increased to 46% in Q3 2009 from 37% in Q2, 86% percent of small businesses participating in the most recent Greenwich Market Pulse say its getting more difficult for them to secure credit, as do 65% of mid-sized companies.
Although credit also remains scarce among mid-sized companies, a leveling off of the Greenwich Credit Availability Index suggests that credit conditions have at least stopped deteriorating in this segment. After declining from Q1 to Q2, the Index for mid-sized companies stabilized and even increased slightly during the third quarter.
Alternative Sources of Cash
For companies hurting from the extended credit crunch, internal funding could be a critical and often overlooked source of cash. In October, consultants from Greenwich Associates joined Carlos Evans and David Trotter of Wells Fargo in addressing participants at the American Banker Middle Market Banking Symposium on ways that Wells Fargo and other banks are helping companies navigate todays difficult credit conditions. The group explained how companies can tap internal funding by more effectively managing working capital.
In addition to continuing vigorous efforts to secure credit, executives of small and mid-sized companies should be questioning their bank relationship managers about their capabilities in this area. Bank relationship managers need to provide constructive advice during these difficult times. Business owners are facing unprecedented challenges and need help thinking through often complex options. If companies are turning to their bank relationship managers only for credit, they might be missing out on insight and capabilities that can make a real difference in these tough markets.
Between 25% and 30% of small and mid-sized businesses have switched banks in the past year, and 60% of all companies are actively seeking new banks or would be open to switching banks if presented with a compelling offer. This share is up from 40% of small and mid-sized companies in the second quarter.
D.C.