Use credit strategically as the recovery gains strength.

• Author: McCaffrey, Lori
• Position: FINANCIAL SERVICES - Geographic overview

The tightened business credit brought on by the recession has begun to lift. Recently, one independent analysis of FDIC data reported five straight quarters of increasing overall commercial and industrial lending by banks.

But as the credit squeeze eases, lenders remain cautious in their underwriting, even as interest rates remain at near-record lows. Consequently, Alaska companies seeking to ride the recovery, as uncertain and erratic as it can seem in the short term, must be strategic in their use of credit.

Steering a company effectively and growing strategically as you shift from defense to offense may depend on the quality of credit you can access more than on any other single factor. This often comes down to how you manage your creditworthiness before reaching out to potential lenders to finance an expansion of facilities, capabilities, equipment, inventory or staff.

Once you have actualized an expansion plan to achieve any of these growth measures, take an honest inventory of internal resources needed to take on any additional debt. Review your staff resources to administer and pay back a lender, including the expertise to fulfill covenants consistently and reliably. Realistically assess the cash flow your company has available to serve both existing debt and the new debt.

ANALYZE LEVERAGE RATIO

Very importantly, analyze your leverage ratio before and after borrowing as preparation for possible additional borrowing, should contingencies or unexpected opportunities arise. This last consideration deserves underscoring, and some perspective. When business credit tightened initially, many companies found they were overleveraged and had no financial cushion to ride out deteriorating conditions. When sales and cash flow faltered, their debt service became unsustainable. That said, it is wise to ensure that your company has sufficient liquid reserves to bridge temporary short-falls.

Also, before borrowing, plan out your exit strategy, which means more than just the simple suggestion to borrow only what your company can pay back. Be clear about how your company will pay back the new debt, taking into account possibilities such as appreciation in your collateral value or in cash flow, or the possible availability of a strategic take-out loan at better terms than currently apply. If your company has multiple credit facilities in place, be thoughtful about allocating resources to pay them down. Paying early may deprive your company of needed...