The Reality Sniff Test
40 Construction Equipment Distribution www.cedmag.com January 2010 Money The scarcity of accessible credit has ranked high on the distributor's list of woes throughout 2009 and will continue to be a source of frustration for many well into 2010, yet another layer that's blocking business like a sticky film of plastic-wrap. You can see money on the other side of the banker's desk, but darned if you know how to get through to it. From the distributor's point of view, credit just dried up beginning fall of 2008, for both themselves and their contractor customers. From the banker's perspective (CED spoke to three of them), their credit standards haven't changed a mite instead, it's the financial performance of their construction industry borrowers that have changed, and dramatically so. In fact, it appears both perspectives are valid, but with one key caveat: Banks always had standards, but for a long period of time they were not adhered to by many institutions; and while no one denies that the practice of imprudent, easy credit led to the foul circumstances in which we find ourselves today, it was a system that `trained' both dealer and contractor as to the definition of creditworthiness. And it was an unsustainable definition. It created a mindset that money would always be easy to tap. It was a system that caused construction industry borrowers to expect access to capital based solely on their past history of on-time payments and long-time friendship with their banker. And while the relationship and commu-nication between banker/lender and dealer/borrower is still vitally important today, the criteria for credit approval has recoiled back to where it probably always belonged lending standards based on (1.) high quality financial information produced by a good CPA familiar with the construction industry; (2.) right-sized operations that have been pruned down for profitability in the current market, which is expected to be the new normal for the unforeseeable future; and (3.) a well-developed business plan that holds up to a bank underwriter's scrutiny, based in solid facts and evidence rather than on the dealer's determination or good intentions an achievable plan that can be broken down and assigned to vari-ous branch and department managers and salesmen who can both believe it and execute it, says Ron Riecks, president of Wells Fargo Construction. In other words, the distributor's financial business plan has got to pass the reality sniff test, Riecks says. Too many people aren't through the process of right-sizing their busi-ness, so they're still producing red ink, he said. No financial partner is going to make more credit available Want Credit? Then You've Got to Pass The Reality Sniff Test By Kim Phelan ...which means trading in fictional hopes for sound financial planning. And easy credit won't be cropping up anytime soon.