LENDING-WHAT LENDING? LENDERS SKITTISH ON NEW LOANS OR ADDING TO EXISTING CREDIT LINES FOR BUSINESSES; ONEROUS LOAN CONDITIONS NOW APPLY

Being involved in the business of consulting relating to acquisitions and expanding businesses, we scout the world of banking every week. The markets report continued restrictions on new lending, and they are correct.

As we checked with lenders, or those organizations who appear to be in the business of lending, they have changed their tune as it relates to who and what deals they MIGHT consider for funding.

Typically, the so called ABL lenders (asset based lenders) simply looked at collateral against which they would typically lend according to long established formulas such as 80%-90% against the accounts receivable and 50% of inventories, etc..

Now, since many of them in turn obtain credit lines from their own lenders (banks) have added various other criteria for loan consideration that has the effect of restricting expansion of loans. These include lower percentage advances, added equity requirements, restrictions of dividend payments or distributions to owners/stockholders and minimum cash balances and current ratios. These additional terms were typically not present in prior loans, and their new requirements present barriers to new lending and business expansion.

The various government programs to assist banks have not served as a basis to expand lending, but have been considered by those institutions receiving the payments as a negative and thus the desired effect was not achieved.

Until normal lending behavior returns, there can be no economic recovery, since our system lived and dies on the availability of credit.

Additionally, and more troublesome, is the fact that restricted credit will also have the long term effect or restricting future earnings of the businesses which have restricted credit; thus a vicious circle of less available capital and repeating itself over and over.