Nervous Borrowers Draw Down Lines of Credit

The Wall Street Journal (subscription required) reported a growing number of companies are hoarding cash and tapping lines of credit they don't actually need.

Why?

Fear that their bank lender may withhold it or unable to deliver the funds down the road.

With liquidity crunches in the interbank lending markets and the commercial paper markets, many borrowers are not waiting to make sure their own liquidity needs go unmet. GM, Sally Beauty, Jarden Corp. and Fairpoint Communications are just a few borrowers that have recently tapped or announced intentions to tap their lines of credit. GM recently announced it intends to draw down the remaining $3.5 billion of its $4.5 billion secured revolving line of credit.

Typically, these lines of credit would be quickly paid down. I suspect some of these companies will be letting the money sit in their own accounts till the storm passes over.

Need help finding the right lender or telling your story the right way for your California business? Read "Matchmaking for Business Loans" and give me a call!

Tags : credit crunch , business loans , accounts receivable , cash flow , lines of credit

Very Crunchy, Indeed

The credit crunch will be felt even more in the months ahead as a result of the financial earthquake suffered on Wall Street this past Monday according to The Wall Street Journal (subscription required).

Those with less than stellar credit histories will have the most trouble borrowing money to run and expand their operations.

Need anecdotal evidence of a credit crunch?

One of my colleagues introduced me yesterday to six new deals - all for small and medium sized businesses seeking lines of credit ranging in amounts from $1 million to $10 million. In each case, the borrowers had been told by their lenders to find replacement sources of financing. All of the companies were offering accounts receivable and inventory for collateral.

Here are a couple of reasons these companies are having trouble finding lines of credit.

• operating losses accompanied by negative cash flow
• too much inventory relative to sales volumes
• significant exposure to foreign accounts receivable

Asset based lending will likely be the solution for most of these deals. The interest rates will likely be much higher than what they're currently paying.

I had two interesting conversations today with bankers. The first with an SBA lender who commented on a shrinking pipeline of deal flow. The second with a banker who spoke of cherry picking deals and increasing the interest rates charged to borrowers.

Need help finding the right lender or telling your story the right way for your California business? Read "Matchmaking for Business Loans" and give me a call!

Tags : credit crunch , business loans , accounts receivable , cash flow , lines of credit

Banks Cutting Lines of Credit

According to CFO.com, banks are downsizing companies' revolving lines of credit and pulling out of loan syndications.

Why?

First, to preserve liquidity and shore up balance sheets after large losses in their real estate portfolios. Second, to to put money to work in more profitable loans with borrowers who are using other lucrative bank services.

Easy companies to target for a reduction are those with little if any outstanding balances on revolving lines of credit. Use it or lose it if you want your bank to keep it in place seems to be the message.

According to Oliver Wyman consultant, John Walenta, middle market companies and small businesses may be at greatest risk to modifications to their revolving lines of credit. With these customers, the banks may have contractual rights to demand full repayment at any time.

I'm hearing of more banks cutting back on revolving lines of credit to customers that are in both payment default and those in violation of covenants. Most of the banks I know also won't consider a loan in this environment without a deposit relationship. The asset based lenders are much more active as bank lending continues to tighten.

Need help finding the right lender or telling your story the right way for your business? Read "Matchmaking for Business Loans" and give me a call!

Tags : CFO Magazine , credit lines , credit crunch , lines of credit

Line Up International Receivables Financing First

While the dollar is not as weak as it was earlier this summer, The Wall Street Journal (subscription required) reports that many businesses are still looking to exports to fuel growth to offset economic weaknesses in domestic markets.

A few companies have approached me as of late with cash flow challenges resulting from working capital tied up in international accounts receivable.

While there are sources of accounts receivable financing that will provide funding tied to international accounts receivables, those lenders typically want the exporters to have at least a few months of experience at selling overseas with open credit terms. As always, those customers should be creditworthy.

As I've written in the past, if you're extending credit terms to your customers, you're a lender. Take extra precautions when you're providing credit terms to foreign customers as your own funding sources may not be prepared to provide you with a loan secured by foreign accounts receivable. Or they might be willing to advance your loan, but only to the extent your customers are deemed bankworthy.

Ask your lender in advance of providing terms to your foreign clients so you don't get caught short on the working capital needed to keep the doors open.

Need help finding the right factor or telling your story the right way? Read "Matchmaking for Business Loans" and give me a call!

Tags : accounts receivable financing , exports , working capital , credit terms , international factoring

Beige Book Notes Credit Crunch

The latest Beige Book released this week notes that all twelve reporting districts reported tightening business loan standards. Federal Reserve officials are openly discussing a credit crunch.

Boston Federal Reserve Bank President Eric Rosengren said "the financial problems that initially created a liquidity crunch have now evolved into a more traditional credit crunch," in prepared remarks made available to reporters.

According to Rosengren, "the tightening already appears to be more widespread than it was during the early 1990s, and portends more difficulty in financing business fixed investment and commercial real estate projects in the second half of this year."

The Beige Book is simply a collection of anecdotal information on current economic conditions gathered through through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources.

Too bad they didn't call me - I'm overflowing with anecdotal evidence of a credit crunch for both business loans and commercial real estate loans. More and more deals are finding their ways to asset based lenders as many commercial bankers are declining new loan opportunities and spending their time looking for cheap deposits.

Do you need help finding the right lender or telling your story the right way for your California business? Read "Matchmaking for Business Loans" and give me a call!

Tags : credit crunch , business loans , commercial real estate , bridge loans , Beige Book

Credit Crunch Impact on Middle Market M&A

The credit crunch is being felt by middle market merger and acquisition deals according to emails I received today from both Bank of America and W.Y. Campbell & Company.

Here are five key points I gleaned from these two newsletters:

• Purchase price multiples have declined to 6.8 times EBITDA (earnings before interest, taxes, depreciation and amortization - a proxy for cash flow) from a peak of 8.8 times EBITDA in the third quarter of 2007.
• Acquisition leverage has declined with senior cash flow loans down to 2.5 to 3 times EBITDA from as much as 3.5 to 4 times EBITDA from 12 months ago.
• Asset based loans are playing more of a role in financing acquisitions as lenders are becoming more conservative in underwriting criterion.
• While benchmark rates such as Prime and LIBOR have declined in the last year, credit spreads have increased as much as 200 basis points for mid range middle market acquisition loans.
• Equity injections by buyers are now approaching 40% of the purchase price compared to approximately 30% in 2006 and 2007.

Need help finding the right lender for your acquisition financing? Read "Matchmaking for Business Loans" and give me a call!

Tags : Bank of America , Capital Eyes , W.Y. Campbell , EBITDA , acquisition loans , credit crunch , asset based loans