Street Smarts: What the Financial Crisis Means for You

The rules of small-business banking have changed, and that's bad news for the economy. But there are ways to cope, and there may even be a silver lining.

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Now that we have been through Armageddon on Wall Street, the question is: What effect is all this turmoil going to have on the rest of us -- specifically, those of us who depend on bank loans to finance our companies' growth? My crystal ball is broken at the moment, but I do have some experience in these matters. It seems pretty clear that we are heading back to the time when banks preferred to lend money to those who didn't need it and it took a good deal of ingenuity to get any loan at all. Listen, small-business banking goes in cycles. Even before the latest meltdown, it was clear that we had moved from one cycle to another. Already, I had begun to feel nostalgic for the good old days. Not so long ago, you could still get what bankers affectionately referred to -- in private -- as an "air-ball loan." That was a loan based not so much on your assets but almost entirely on your relationship and history with the bank. Yes, the bank would glance at your company's earnings and cash flow, just to be sure you could make your payments and weren't about to go bankrupt, but the relationship mattered most.

And the terms were terrific. If you were financing your receivables through a bank, the monitoring was extremely light. Often, it was just a matter of submitting a report every other month, whereas an asset-based lender would insist that all the money you collected go into a lockbox. Or suppose you needed equipment. In my business, we kept having to buy storage racks as we grew. Leasing companies would charge us 11 percent or 12 percent interest, and we would have to pay the loan back in four or five years. Banks, on the other hand, would charge 6 percent or 7 percent, stretch the payments out over 10 years, and give us a balloon at the end. That translated into a whole lot of additional cash flow.

And banks were falling over themselves to lend us money. I would get six to eight unsolicited calls from bankers every month. Sometimes they would show up in our lobby unannounced, saying they just happened to be in the neighborhood and thought they would drop by. Now, you have to understand that our offices are at the end of a street, with only one other business anywhere near us -- a doggie day care center. Nobody "just happens" to be in our neighborhood. We welcomed the bankers anyway. You never know when an extra one might come in handy.

But those days are gone. Two encounters with banks in the past three months clearly demonstrated to me that we were in a whole new world in terms of banking. One occurred in Telluride, Colorado, where I'm building luxury homes with my partner Ernie Graham. We needed to borrow $4 million to cover the building costs, and Ernie suggested we use a local bank. He set up a luncheon with two of the bank's top people, and they indicated immediately that they were very interested in financing the project. My wife, Elaine, and I had already thought about the terms we wanted. Having just gotten rid of the personal guarantees we had had to pledge to finance our companies (see "Free at Last," September 2007), we were reluctant to pledge our own assets as collateral, and I said so. The bank president said he would need to examine my personal balance sheet, which I had brought along. He took a look at it, and we left the luncheon thinking we had a deal.

But a week later, the bank president called and said that because we weren't giving a personal guarantee, the bank would lend us the money only if we made a "substantial" deposit, by which he meant an amount equal to 50 percent of the loan. I pointed out that a deposit of that size was hardly necessary from a security standpoint. Our development company had unencumbered assets of $7 million. Once the construction was finished, the value of these assets would rise to more than $16 million. The risk to the bank was minimal. But it turned out that risk wasn't the issue. "In order for us to make loans, we need deposits," he said. "Things are very tough right now."

"In that case," I said, "I think I'd rather give you a personal guarantee." I didn't like the idea of tying up my money in a bank account.

"OK," he said. "I'll run it by the board." Another week went by, and he called me back. "The board would really like to lend you the money," he said, "but we only want to deal with people who are customers."

"Fine; we'll open an account," I said.

"You would still have to make a substantial deposit," he said.

It was June by then, and every day brought news of another troubled bank. The big issue, I realized, was the Telluride bank's solvency, not mine. "Why don't you send me the bank's balance sheet," I said.

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