Bank Lending - Sharpest Decline Since 1942

Shocker! U.S. banks last year posted their sharpest decline in lending since 1942 according to today's Wall Street Journal (subscription required).

I'm trying to figure out why this article was front page headline worthy for The Wall Street Journal no less. It's old news.

Senior bank lending officers have been reporting for two years about tightening credit. In fact, they tightened credit so much, they can't tighten any more.

Many banks are still amongst the walking wounded due to troubled commercial real estate loan portfolios. Yesterday, the FDIC announced its problem bank list hit a 16 year high of 702 troubled institutions. Many of these banks will likely fail and others will be unable to lend in support of an economic recovery for a long time to come. The FDIC shuttered 140 banks in 2009 and 20 banks year-to-date 2010.

In the meantime, the Commercial Finance Association (CFA) just released its Quarterly Asset-Based Lending Index, Q4 2009, revealing continued stability and signs that U.S. businesses are seeking alternative sources of stable funding from non-bank, asset-based lenders. In the fourth quarter of 2009, total committed credit lines grew by 1.2 percent among asset-based lenders, while 50 percent of respondents reported an increase in new credit commitments.

By the way, Harry Reid's stripped down jobs bill just stripped out additional funding for SBA small business loans. The original $85 billion "jobs" bill included additional funding for the SBA to continue offering small businesses enhanced loans guarantees and elimination of guarantee fees. The SBA just exhausted its $855 million of stimulus funds which it claims resulted in over $20 billion of loans to small businesses in the last 12 months.

Notwithstanding all of the backwards looking news, I am seeing the green shoots of recovery. A couple of very large banks may be feeling the populist pressure to pump up lending and are adding to their lending teams. Even Huntington Bank, notwithstanding five consecutive quarters of losses, has announced it is doubling its annual small business lending and has announced it will originate $4 billion of new loans in the next three years.

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 : small business , bank loans , SBA loans , asset based loans , Commercial Finance Association , Huntington Bank

Asset Based Lending Grows

Asset based lenders have stepped up to fill the capital gap caused by the credit crunch for borrowers both large and small according to The Wall Street Journal (subscription required).

According the Journal, asset based lending may have increased by double digits in 2009 after an 8.3 percent increase in 2008. Given the article was focused on small business, it would have been more interesting had the Journal been able to learn the percentage growth of asset based lending for deal size less than $10 million.

The Journal notes that drawbacks of asset based loans include relatively high interest rates. Asset based loans can range as high as 35-40 percent per annum when a borrower is using factoring or purchase order financing. However, there are some lenders that will provide asset based loans at rates in the single digit range. Even the SBA has a program that provides asset based lines of credit at rates currently below 10 percent!

Also this past week, the Federal Reserve's January 2010 Senior Loan Officer Opinion Survey on Bank Lending Practices was released.

The January survey indicated that commercial banks generally ceased tightening standards on many loan types in the fourth quarter of last year but have yet to unwind the considerable tightening that has occurred over the past two years.

Expect to see asset based lending continue to grow in 2010!

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 : Asset based loans , factoring , purchase order financing , lines of credit , SBA loans

Who Will Fund Inventory Growth?

GDP grew at its fastest pace in six years in the last three months of 2009, expanding at a 5.7 percent yearly rate over the previous quarter according to The Wall Street Journal (subscription required).

The largest portion of the growth, 3.4 percentage points, came from businesses shrinking inventories more slowly than in the previous quarter to accommodate increased demand. Shrinking inventories means increased production to prepare for future sales increases.

One can argue about how much of the inventory buildup came from one-time events such as government stimulus programs, but one thing is clear. Businesses will have to increase inventories as the economy recovers.

Where will the money come from to fund the inventory growth is a bigger question.

I know very few bank or commercial finance lenders eager to lend for inventory increases. In fact, one middle market commercial banker told me at lunch that inventory increases are the last thing he wants to fund. Don't expect to see improved appetite for inventory lending until cash flow improves.

Some asset based lenders will provide lines of credit when there the borrower is profitable and subject to sublimits tied to accounts receivable. I also know one lender who will lend against inventory only in amounts up to $10 million. The terms are tough and the pricing is not for the faint of heart.

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 : inventory loan , GDP growth , line of credit , working capital

Extend and Pretend

The recent bank practice to "extend and pretend" was the focus of a commercial real estate panel discussion held last night at UCLA. The moderator, Jesse Sharf of Gibson, Dunn & Crutcher, questioned four leading members of the commercial real estate industry on a variety of topics including "when will deals reappear?".

About two hundred attendees listened attentively to the responses of John Brady (Oak Tree Capital Management), Samuel Freshman (Standard Management Company), Bill Lindsay (Pacific Coast Capital Partners) and Sean Mahon (Wells Fargo Bank).

Here are the highlights from my perspective:

• The October 30, 2009 (the night before Halloween) guidance issued by the FDIC and other regulators has made it very easy for banks to extend and restructure commercial real estate loans that otherwise could have been classified as troubled assets.
• Commercial real estate values will likely drop to 50 percent of their peak values as cap rates increase from 6% to 9%.
• There is a HUGE shortage of capital available to re-finance all of the commercial real estate loans maturing in the next three to five years due to the implosion of the CMBS markets and balance sheet challenges faced by the commercial banking community.
• Low interest rates are keeping a lot of commercial real estate loans from going into default. Look for the Federal Reserve to keep benchmark rates low for the foreseeable future.
• Deal flow for commercial real estate loans and investor opportunities will not recover until the unemployment rate starts to drop.
• All four panelists opined that commercial real estate values will continue to decline in 2010.

If you were looking for some good news from last night's meeting - well, they served a very nice chardonnay! Crisp, refined and a hint of pear.

I've still got some commercial real estate bridge lenders actively pursuing loan opportunities of at least $1 million. Give me a call if I can help!

Tags : extend and pretend , commercial real estate loans , FDIC , bridge loans , private money loans

Turnaround Management Association - A Hard Slog

Nearly half (49%) of the respondents to the Turnaround Management Association's (TMA) distressed industries forecast think durable improvement in the economy is unlikely until at least the second half of 2010. About three out of ten think the worst is over, but nearly 20 percent suggest the economy has yet to hit rock bottom.

Access to capital remains a big question for how the economy will fare in 2010 according to 52 percent of respondents.

Three out of four respondents think the commercial real estate industry will fare the worst in 2010 as debt matures and lenders remain reluctant to refinance.

"Overleveraged balance sheets are one of the primary causes of industry problems," said William K. Lenhart, CTP, a partner with BDO Consulting in New York. "In 2009, many lenders were more willing to 'extend and amend' terms so borrowers were not in default. It is unclear if these companies took this opportunity to improve operations, reduce expenses and sell off underperforming assets to reduce debt."

My own sources have referred to many commercial bank lender's actions in 2009 as more like "extend and pretend" or "delay and pray".

Happy new year? We'll see.

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 : Turnaround Management Association , TMA , extend and pretend , commercial real estate , bridge loans

60 Minutes: You're Stupid and You're Fat!

President Obama told 60 Minutes last night that it was "fat cat bankers" that caused the US financial systems to almost completely fail.


Watch CBS News Videos Online

No blame for Congressional members who were taking campaign contributions from the financial services industry and then failed to adequately supervise the likes of Fannie Mae, Freddie Mac and Bear Stearns.

No blame for borrowers who gorged on cheap money when the cash flow of their businesses couldn't demonstrate an ability to pay back those business loans.

Nope. Just the stupid bankers.

Now I'm not defending the fat cat bankers. Just trying to add some perspective that there's a lot of parties that should share in the blame of this financial fiasco.

However, that sound bite won't play as well on 60 Minutes. Or maybe something got left on the editing room floor.

I'm sure the President's meeting today with the banking community will go well when he tells them to lend more money while his regulators tell them don't be "stupid".

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 : fat cat bankers , stupid bankers , 60 Minutes , President Obama

Business Lending Down Six Percent

Business loans in the third quarter of 2009 were down almost six percent according to The Wall Street Journal (subscription required).

No doubt this decline will pit those in Congress who claim that TARP funds should lead to increased lending against bankers who claim regulators are demanding that lenders take less risk in these troubled times. With a fear of a second round of troubled loans primarily in commercial real estate, banks are as risk averse as ever.

The FDIC's troubled bank list now totals 552 problem banks - approximately seven percent of all banks. Fifty banks failed in the third quarter - the most bank failures in a single quarter since the fourth quarter of 1992. "Failure Friday" took a holiday break over Thanksgiving weekend. Look for bank failures to re-commence sooner than later.

If your business loan request is already in process, you still have a chance of obtaining funding in 2009 if you are working with the right lenders. Otherwise, a 2010 funding is the more likely scenario.

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!

Related Tags: factoring, accounts receivable, p.o. financing, purchase order financing, bank loans, equipment leasing, working capital, cash flow

Walmart Shifts to Supply Chain Finance

Wal-mart recently announced a new supply chain finance program according to this weekend's Wall Street Journal (subscription required). I first wrote about supply chain finance in April 2007.

This supply chain finance program will provide Wal-mart's suppliers with accounts receivable financing - a market which has experienced significant turmoil given the bankruptcy filing of CIT and the credit crunch, in general.

Wal-mart's partner banks, including Wells Fargo and Citigroup, will be providing factoring to Wal-mart's suppliers. It is unclear whether these rates will be any cheaper than those offered by other factors and accounts receivable financiers.

The article mentioned that other retailers, including Kohl's, are also experimenting with supply chain finance programs.

If you're having difficulty with your accounts receivable funding in light of the CIT situation or general market conditions, give me a call!

Tags : Walmart , CIT , supply chain finance , accounts receivable , factoring

CIT, Commercial Real Estate and Workouts

Lots of issues to think about these days with respect to loan workouts, CIT's bankruptcy and commercial real estate.

• Last week, I attended the Risk Management Association's panel discussion on loan workouts and restructurings. Panelists included three bankers from the loan workout departments and an attorney who crafts loan workout agreements. The panel's consensus was expect another year of increasing loan defaults in the world of commercial real estate and business loans. Until this workout activity starts to decline, new loan origination activity is not likely to pick up.
• I still cannot figure out the real impact of the CIT bankruptcy. Many borrowers won't be able to find new lenders because CIT's advance rates against inventory was too high and their interest rates were too low relative to current rates. Some borrowers won't find new homes because they won't find another lender with the back-office capabilities of CIT that has traditionally provided.
• The FDIC issued new guidance to commercial banks allowing them to keep commercial real estate loans on their books as "performing" even when the underlying property value has declined. I suppose this is similar to guidance issued for modification of residential real estate loans with the intent to avoid more losses for banks at a time when their balance sheets cannot afford the earning hit.

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 : CIT Group , CIT , bankruptcy , factoring , accounts receivable loans , commercial real estate , FDIC

Do You Really Want to be Banker of the Year?

Less than a year ago, then Chairman and CEO of Bank of America, Ken Lewis, was named Banker of the Year for the second time by American Banker.

Today, The Wall Street Journal (subscription required) announced that Mr. Lewis will retire from Bank of America by year end. This announcement comes just months after Mr. Lewis losing his chairman title over the Merrill Lynch debacle.

Mr. Lewis now joins Kerry Killinger (ousted CEO of Washington Mutual), Ken Thompson (ousted CEO of Wachovia) and Angelo Mozilo (ousted CEO of Countrywide) on the list of former Banker of the Year honorees who thereafter lost their jobs!

Sounds a bit like the Sports Illustrated cover jinx. Do you think any banker in their right mind wants to win next year's award?

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 : Banker of the Year , American Banker , Ken Lewis , Bank of America

45 Days and Counting!

This afternoon, I dropped by the 2009 M&A Business Conference for the Association of Corporate Growth's Los Angeles chapter. Both the lobby and the Capital Connection room were buzzing with activity.

The Capital Connection room was filled with representatives of over 100 private equity firms with one lender and one commercial real estate sale-leaseback firm thrown in for good measure. The room was packed with deal makers trying to figure out how to get a piece of the $400 billion of equity overhang that everyone keeps talking about!

Spoke to a few of the lenders milling about and each one confirmed the same. If you've got a business loan that needs to be funded by year end, you need to submit the deal to a lender (preferably with a complete due diligence package) by Halloween. After that, there's a reduced likelihood the deal could close by New Year's Eve.

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 : Association of Corporate Growth Los Angeles , sale leaseback , business loans

Credit Crunch Officially Over

The credit crunch is officially over - at least for one of my clients, an operator of barges and a tugboat.

When referred to me by a Southern California chief financial officer, the borrower had to complete a refinancing of purchase money debt within 25 business days. They were in discussions with six commercial banks, but getting nowhere fast. The bankers were quite interested in the company's deposit potential, but had absolutely no interest in providing the equipment loan.

Within days of being hired, I submitted a completed application and full due diligence package to an SBA lender. A cooperative and well prepared client was a huge plus! We received an approval for an SBA 7a loan within 10 days, subject to an appraisal. The deal closed the last week of August with days to spare before the borrower's deadline.

Why is the credit crunch over for this borrower?

Funding 911 knew the right lender and presented a convincing story on why the SBA lender should expect full and timely repayment of the loan. The borrower can now focus on growing a successful company and not worry about finding money.

A couple of quick notes on the SBA loan market...

According to many sources including this CNN report, SBA loan volume has picked up significantly compared to earlier this year primarily because the secondary markets for SBA loans has healed itself - without much assistance from the government. The ability to quickly replenish their coffers and the attractive premiums once again available for selling these loans have enticed lenders to make more SBA loans.

By the way, as part of the spring stimulus passed by Congress, the SBA was granted over $700 million to increase guarantees and waive borrower paid guarantee fees. Sources say that these funds may be completely utilized by the end of the calendar year. If your business is considering an SBA loan and wants to avoid the stiff guarantee fees, don't wait to apply!

Tags : SBA loans , 7a loan , SBA lender , business loans , equipment loans , credit crunch

Tightening the Screws on Cash

Money tied up in working capital is not available to grow the business - or in today's environment, not available to help a company survive the economic turmoil.

So it's not surprising that The Wall Street Journal (subscription required) gave front page coverage to the most recent study by REL Consultancy on how big firms are expediting cash collections and slowing cash payments - particularly at the expense of the smaller or weaker companies with whom they conduct business.

The largest companies are particularly good at this cash flow exercise. Companies over $5 billion of annual revenues remit their payables on average in 55.8 days and collect their receivables in as little as 41 days - a net of almost 15 days of working capital in their favor.

Companies below $500 million in revenues are not quite as successful in managing cash flow. The cash is going out the door faster than it comes in! The small and mid size enterprises take almost 59 days to collect their receivables while remitting payments in a fraction over 40 days - a net of almost 19 days of working capital to their detriment.

Many of the small and mid sized companies that I see are experiencing a similar working capital crunch. As a result, some of these companies lack the cash to take advantage of new orders that could lead to a return to profitability as the economy improves.

In an environment where credit is tight and more expensive, it pays to carefully watch one's working capital and cash flow!

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 : working capital , cash flow , accounts receivable , credit crunch , REL Consultancy

Tracking the Nation's Bank Failures

The FDIC announced that its "problem bank" list has grown to 416 banks, an increase of 111 banks since last quarter according to The Wall Street Journal (subscription required). If my math is correct (and my logic sound), the problem bank list has actually grown by close to 160 banks when one considers that bank failures in the last quarter totaled almost 50 banks.

While concerns grow that the FDIC's insurance fund is about to be consumed, the questions intensify over whether or not the FDIC may soon be forced to borrow from its $100 billion line of credit at the Treasury Department.

Within the online version of The Wall Street Journal (subscription required), they created this great little interactive tool to show readers which banks have failed this year, the size of the institution, the name of the rescuing bank and the cost to the FDIC

Honors for costing the FDIC insurance fund the most - IndyMac Bank at $8.9 billion.

Honors for being the biggest failure by asset size - Washington Mutual with $307 billion of assets.

The problem bank list still represents only 5 percent of all banks. There is still money available for all types of business borrowers with a variety of risk profiles. Even bank money.

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 : Problem Bank List , Failed Banks , FDIC , Washington Mutual , IndyMac Bank

Wells Fargo Claims Top Ranking from CIT

Wells Fargo is the new king of SBA loans.

According to a study by Foresight Analytics, Wells Fargo funded 7.7% of all SBA loans in the first nine months of the fiscal year while struggling CIT Group's 1.1% market share dropped it to 16th place in the rankings.

When taking into account the Wells Fargo acquisition of Wachovia Bank, their combined market share of SBA loans rises to 9.3% of the market.

CIT Group had held the top spot in SBA loan production for nine years until its recent challenges put an end to its marketplace dominance.

For those borrowers who qualify, now is a good time to consider an SBA loan. Between the fee waivers and the recovery of the secondary markets for SBA loans, activity levels are picking up. There are a lot of smaller, regional banks looking to add to their SBA loan portfolio.

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

Tags : SBA loans , 7a loan , Wells Fargo , CIT Group , top SBA lender

Latest in Lending Developments

Here are a couple of things I have read in the last few days about the business loan and commercial real estate loan environment.

• According to the July 2009 Senior Loan Officer Opinion Survey, demand for business loans and commercial real estate loans continues to be weak. Credit is still tight, though the number of banks increasing credit underwriting guidelines is lower than it was in the peak of year end 2008. Don't count on lending returning to "normal" before late 2010 or 2011 for either bank loans or commercial real estate loans.


• Bank closings continue at a record pace with eight bank closings in the first half of August bringing the year to date bank total to 77. Over 300 banks were on the FDIC's troubled bank list as of the end of May according to The Wall Street Journal (subscription required). Don't expect the pace of bank closings to slow anytime soon.


• It is increasingly difficult to tell if CIT's fortunes are improving if you were to read this August 13th Written Agreement with the FDIC. Regardless of who your lender is, it's not a bad idea to know your options at a time like this. I imagine there are plenty of lenders who finance accounts receivable that are licking their chops as CIT tries to overcome its challenges.


• The spring stimulus bill has been good news for the SBA. SBA loan volumes have significantly increased and there is some concern that its allocation of stimulus money to waive guarantee fees may run out by the end of the calendar year. I'm in the process of closing a $1.3 million SBA 7a loan which was approved in less than ten days!

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 : Bank loans , commercial real estate loans , CIT Group , troubled bank list , SBA loans , accounts receivable financing

Vulture Lenders Are Back!

Vulture lending is back according to The Wall Street Journal (subscription required). New data from Dealogic pointing to 140 distressed debt deals valued at over $84 billion in which creditors used their debt positions to seize control of troubled companies.

The deals cited included corporate takeovers resulting from bankruptcies, restructurings, recapitalizations or liquidations.

The front page article suggests that many of today's vulture lenders are hedge funds who are increasingly thinking about a "loan to own" strategy. However, it is hard to know if the hedge fund lenders in these corporate takeovers were merely executing upon one of their exit strategies to recover their loan balances or if their original intent was to own the company.

In late 2006, I provided a few tips on how to identify if your lender is a vulture. If your considering new lenders, it's a good time to revisit those tips. If you've already got lenders who are beginning to act suspiciously, it's probably too late to do anything about it.

Here are three questions you might ask to determine if your lender is a vulture...

1. What actions has this lender taken with its other borrowers in the event of a default?

2. Are the proposed covenants tighter than a company can realistically expect to achieve if anything goes wrong with the plan?

3. Is the financing transaction structured in a way that creates a situation in which the new lenders or investors have better claims on a company's assets and income than do existing common shareholders and lenders?

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 : vulture lender , distressed debt , loan to own , business loans , cash flow problems

Forecast Your Cash

I’m struggling with a manufacturing client that is not able to generate a financial model which can provide comfort to a bank that the company can repay its debts. Without a forecast which is based upon solid and defensible assumptions, this manufacturing company could be forced to obtain capital at much higher interest rates than a bank would charge.

By hiring a third party resource to create a robust, dynamic financial model, the manufacturer could generate multi-period reports that would help the company and its lenders answer such questions as:

· How much capital will I need?
· How long will my cash last under various scenarios?
· How will I be able to repay my loans?

But the client is hesitant to spend the money even though it could potentially save over $150 thousand of annual interest expense. The cost to hire an expert to create the financial model? In this case, less than 5 percent of the savings.

I recently spoke with Daniel Feiman of Build It Backwards, a management consulting and training services firm, which develops financial models for businesses ranging from start-ups to established firms with annual revenues exceeding billions of dollars. Feiman just published “What Everyone Needs to Know About Financial Modeling” and here’s one portion of our discussion I found particularly compelling.

"A common mistake in financial models is not having a solid understanding of what CASH is and is not. Revenues are not cash. Gross margins are not cash. Profits are not cash. Only cash is cash. Slight changes in the timing between cash receipt and disbursement - even just a couple of weeks - can bankrupt your business. Therefore, a good model will reflect not only cash flows generated by your firm but also their timing."

From your lender's perspective, a good financial model understands cash and can answer the three questions shown above. If you cannot answer these cash flow questions for your banker, the teller’s window will be closed.

If you would like a copy of “What Everyone Needs to Know About Financial Modeling”, click here. Daniel Feiman can be reached at 310-540-6717.

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 : Financial Models , cash flow , bank loans , Daniel Feiman , Build It Backwards

Bankruptcy for CIT?

The $60 billion finance company, CIT, is negotiating for a government rescue while also having retained bankruptcy counsel.

The outcome is unclear as various press sources report that the US government does not feel that CIT's failure would create a systemic risk to the financial markets. Same conclusion that was reached with Lehman Brothers last fall and the outcome wasn't pretty.

CIT is a major asset based lender to small and medium size businesses offering products including factoring, accounts receivable lending, equipment finance, SBA loans and cash flow loans to a wide variety of industries. Its factoring and accounts receivable loans have been available to companies with revenues as little as $5 million.

Many of these borrowers are probably quite nervous at the moment. While the government may reach the opinion that J.P. Morgan Chase, Wells Fargo and Bank of America can replace CIT in the marketplace in the long run, the short term chaos in the meantime could be significant. These and other asset based lenders could be overwhelmed if the curtain came down on CIT and borrowers had to find replacement lenders on short notice.

Are you a current CIT borrower and worried about your options? Read "Matchmaking for Business Loans" and give me a call!

Tags : CIT Group , CIT , bankruptcy , factoring , accounts receivable loans

Factoring for California IOUs

One of my factoring sources has told me they are providing emergency funding of California IOUs. This could be a huge assist to many small and medium sized businesses who conduct business with California but may not be able to collect on their invoices for months given the current budget stalemate in Sacramento.

The factor will buy the IOUs for 90% of the face value - you can sell as much or as few of your California IOUs as you need to support your working capital requirements. There are no minimum contract periods. The spot factoring is non recourse to the borrower - if California doesn't pay the IOUs, the factor will not require the borrower to make them whole.

If you already have a lender which has a senior lien on your accounts receivable, it doesn't matter. As the funding source is buying the IOU, it will not be subject to the senior lender's lien position.

Got that? Any questions on how to sell your California IOUs, give me a call at 310-371-4011 ASAP!

Tags : California IOUs , accounts receivable , factoring , asset based line of credit , cash flow