Monday, March 12, 2007

Real Estate Loans and the Capital Crunch

The headlines for the last couple of weeks have been filled with stories about the fallout resulting from the collapse of the sub-prime real estate loan markets. After the shutdown of Fremont General's sub-prime group and the possibility of a bankruptcy filing by New Century, don't expect the news on real estate loans to get better any time soon.

Why not? For the last six months, I have been talking about the changing dynamics in the availability of capital for businesses tied to real estate loans.

First: On July 19th, I discussed that businesses seeking to borrow money against their personal residences might soon find that the liquidity in that marketplace was drying up. Don't expect to see leverage on home loans at 100% and more - in fact, expect leverage on home loans to drop toward 90% and likely much less. Also, don't count on funding your business by borrowing against the growing equity in your home. Depending upon the region of the country, home values are dropping like lead balloons.

Second: On September 11th, I warned that an impending clash between regulators and banks might result in a decrease in loans to businesses secured by commercial real estate. On December 7th, new, tighter guidelines for business loans secured by commercial real estate were released. The impact of these new guidelines will be seen over the next few months.

The bottom line - don't wait any longer to wean your business from raising capital solely tied to your real estate.

If your business needs capital to grow, you should investigate business loans secured by the other assets in your business - receivables, inventory and equipment. These loans are available from banks, commercial finance companies and a number of legitimate institutional lenders. Pricing? The companies with the least credit risk pay the lowest rates. Everyone else will pay a rate that is "market" for the risk profile.

And if you need help finding the right asset based lender or telling your story the right way, give me a call.

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