Linda Goodspeed reports in the Boston Business Journal  that unless your company is making money, your chances of obtaining credit are slim to nonexistent. But the reason is not because of lending restrictions, but because of market constrictions.

“Credit is not any harder to obtain than it ever was. We have the same underwriting standards and approach to lending that we did five years ago,” said David Falwell, executive vice president and chief lending officer at Middlesex Savings Bank in Natick. “What has changed is the marketplace. It’s more difficult for companies to make money. Financial statements are weaker. A company that would have qualified for credit a couple of years ago might not qualify today because it’s not making any money, not because lending requirements have changed.”

There are dozens of reasons why and when companies need credit. These needs generally fall into three broad categories: working capital to fill the gap between expenses (payroll, supplies, overhead) and receipts; some kind of term loan to purchase new equipment, finance an acquisition, expansion or some other major expense; and a commercial real estate loan to purchase or finance real estate.

“In good times the most usual borrowing comes from growth of the company, either organic or through acquisitions,” said Joe Holland, senior vice president in the commercial banking group at Eastern Bank in Boston. “In bad times those requests are fewer and often you’re funding losses. In this environment, banks need to make sure they’re not funding losses, or if they are, only temporarily.”

Phil Bryan, senior vice president, retail and lending at Metro Credit Union in Chelsea, said lenders are looking at the same three criteria they always did when assessing credit worthiness: collateral, cash flow and credit history.

The difference today, according to Bryan, is the negative impact of the recession on those items. Values of collateral — real estate, for example — have dropped. Weak sales and slow receipts have negatively affected cash flow.

“As a result, you have a harder time getting a loan, but not because underwriting has changed,” he said.

Bryan said having a revised business plan to address these kinds of issues is essential.

“Lenders want to make sure companies are being proactive,” he said. “What are you doing to address problems? Have you changed terms with suppliers? Are you planning layoffs? Cutting shifts? Make sure you recognize that you have an issue and have a plan in place to address that issue.”

Added Holland, “What we’re seeing in this economy is companies adjusting to new lower revenue levels and having to reduce their cost structure. Until they get there, they often have losses. The environment has required companies to change their business plans to adjust to new revenue levels. That’s the major change from how lending has been.”

Commercial lenders caution that for some companies, now is probably not the time to be looking for new credit. Rather, it is a time to be working closely with lenders they already have relationships with.

“Unfortunately, fewer companies are doing well,” Falwell said. “The credit options for them are more limited. They may be limited only to the bank they’re currently with.”

Communicating and working with your current bank is essential, especially if you are showing losses. Keep your lender informed, take them through what the problems are and how you are addressing them.

“The first principle of good business banking relationships is talk to the bank,” Falwell said. “Keep them informed. It you’re talking to the bank you’re already with, that’s the best place to be in terms of working through difficulty.”

Boston Business Journal