Wednesday, January 17, 2007

Bad Loans Rise

The Wall Street Journal reported that increases in bad business loans deepened worries that a downturn in credit quality has begun and could worsen. Based upon the fourth quarter results released by Wells Fargo, U.S. Bancorp and Marshall & Isley, loan losses from both commercial and real estate loans are on the uptick.

David Hendler, an analyst of independent research firm Creditsights Inc., believes that the long warned weakening of a weakening in credit quality is finally happening. He believes that the pain is likely to be felt by small and mid-sized banks that are less diversified and too reliant on construction and mortgage lending.

I've been wondering out loud for some time when banks would start to feel the pinch. The extreme competitive nature of the financial services sector has resulted in banks chasing marginal business loans for quite some time. That may work when the prime rate is at 4.0 percent. But when prime rate more than doubles in a short period of time to its current 8.25 percent, a number of companies will experience stress in meeting business loan covenants.

Don't be surprised if your bank is a bit more reluctant to provide you with a business loan in the near term as they tighten their credit requirements. Perhaps it's time to consider asset based loans including purchase order financing, factoring and leasing as a way of meeting your cash flow needs.

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

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