Navigating Tight Credit Markets

It is hard to pick up a publication or turn on the news without seeing or hearing about the home mortgage woes and the financial crisis of 2008. It certainly warrants its share of attention considering its impact stretches into every community. Much less has been written about the trickle-down effect it is having, or will have on businesses. In our eyes the home mortgage debacle is a snowball that has just begun to roll down the hill. One that will significantly change the commercial lending arena for years to come.

Commercial borrowers have experienced a very prosperous decade. Many in our market have seen their businesses flourish and expand. During this time period we have also seen a growth in the number of financial institutions serving our marketplace. These new lenders, as well as the old established ones, created a very competitive market for borrowers. These factors not only affected loan pricing, but also lead to less stringent debt covenants and other restrictions.

These competitive forces will most likely evaporate as markets shake out in more difficult times. Some will call it an overreaction. Others will say it is a return to more prudent times. We suspect the answer lies somewhere in between. In any event, the lending environment for commercial loans is going to change considerably. Businesses need to be ready to address a different lending environment.

What changes can businesses expect to see?

• Lenders in many cases will shift away from industries or sectors that they no longer find appealing or worth the risk, as they reshuffle their loan portfolios.

• Many borrowers will find their businesses looked at under a different microscope. Typical lending arrangements will no longer be taken for granted. For example, lines of credit previously renewed, with little thought or change, will become less certain.

• Lenders will pursue additional collateral, restrict borrowing capacity and tighten debt covenants.

• Personal guarantees on commercial and real estate loans will become much more prevalent. Individuals will find it much more difficult to avoid.

• Reporting compliance will tighten. Emphasis on third-party financial statements, such as audits and reviews, will increase. In many cases lenders will require monthly and quarterly financial information so they can more readily monitor business performance.

The pendulum has already started to swing in the financing markets from a “pro-borrower” arena to one of “risk adversity”. Regulators, shareholders and loan committees are demanding such changes. Businesses need to be prepared.

As a result of our experience, the professionals at BLD are in a unique position to help you evaluate your options and deal with many of these changes.