For small businesses looking to get loans starting a few years from now, you need to be able to talk intelligently about your debt-to-equity ratio and how it has been screwed up by a new accounting rule that will probably be enacted in 2011 and beyond.
Here’s the gist of it:
- Instead of noting your leases as a footnote on your books, you will have to carry them as a liability
- When you carry them as a liability, this increases your debt-to-equity ratio
- When your debt-to-equity ratio increases, (a) it is harder to get a loan and (b) you might lose a standing line of credit that you have come to depend on regularly (for temporary debt like payroll or other seasonal credit demands)
Here’s what you can do now: Speak up! If enough small businesses don’t voice their concern over this change, you’ll end up with a law that isn’t representative of what small business owners want. While we might not be able to stop it, we might be able to get FASB to only release this law in parallel with notices to banks that they should calculate their debt-to-equity ratios without leases included for lending purposes so as not to start another credit freeze just as we get out of this economic downturn. Click Here to send an email to FASB to say just that.
Here’s what I’ll do when the rule goes into effect:
- Ask my banker or loan officer if they have updated their debt-to-equity ratio qualifications to be less stringent given that all leases need to be carried as liabilities on your books. If not…
- Ask the loan officer if his bank will re-calculate your debt-to-equity ratio without including leases and then use that number for your loan application with a footnote indicating what your actual debt-to-equity ratio is. If not…
- Consider taking my business somewhere else that has updated their debt-to-equity ratio qualifications or that will use an adjusted debt-to-equity ratio for your business loan.
While this rule change is more than a year away, you and your business will probably want to start planning today so you don’t end up scrambling later. I’m planning on meeting with my local bank manager to discuss my lines of credit and my wife’s loans and lines of credit to get him talking to his superiors to help push the initiative to adjust the debt-to-equity lending requirements as soon as the FASB rule goes into effect.
Here’s Why: Meeting with your banker now will make you look smart with your banker, help him look smart with his bosses, and should end up with you having a stronger relationship with your bank that will help you get better rates and help them go to bat for you if the bank ever considers removing a line of credit or calling your loan due.