Banking industry veteran Gary Deutsch of BRT Publications says small businesses rarely pay enough attention to the forces influencing money. “If they had a better insight into the cycles in the banking industry, they’d be better prepared … and better able to prepare a company to handle the ups and downs,” he believes. Here are his practical tips for builders who want to avoid the next credit crunch.
Develop relationships with a variety of banks–local, regional, and national—so you aren’t left out in the cold by either banking consolidation or tightening credit conditions. “Banks want to get all your business, so builders get enticed by deals during the good times. But that doesn’t help them on the downside.”
Pay attention to the banking industry’s credit cycles, which typically lag behind the larger economy. “Banks are not as tuned in as they should be, so they tend to be more reactive. This often turns out to be a knee-jerk reaction where they tighten lending after the fact and after the shows real signs of a downturn.” (This is particularly important for builders, since housing construction is considered a leading indicator of economic activity.)
If your local economy stumbles, it’s time to reconnect with longtime lenders and establish new banking relationships so you’re prepared for the inevitable constraining of capital in the year to come.
Watch for regulatory changes affecting banks and lenders and their involvement in real estate lending. It may sound arcane, but Deutsch notes that regulators cautioned banks back in 2006 about their concentrations of AD&C loans and suggested raising capital reserves to guard against potential losses; that recommendation is one of the many factors in the current dearth of credit available to builders.
Alison Rice is senior editor, online, at BUILDER magazine.
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