Times have changed. Gone are the days were on the second hole of golf with your Banker you casually mention that your company might miss its debt service covenant due to a delay in shipping a big order. "No Problem", your banker says as he crushes a drive down the middle of the fairway. Good laughs, good times.
Now, your Banker would lose the grip of his club sending his new titanium driver 50 yards down the fairway. Not only that, his boss in the next golf cart is already thinking about how this is going to play at credit committee.
How will it play? Well, not good. Whether its high profile real estate projects experiencing slight delays (read today's Wall Street Journal below the fold), or a business whose quarterly tax payment by the owner tripped a covenant, your banker doesn't care.
Loan portfolio problems persist everywhere and they affect you as a borrower - whether you are applying for credit or adjusting your existing credit agreement. Comforting factors such as the length of the banking relationship, being on the Bank's advisory board, donating to the Bank's charity of choice are butkus. You are in trouble.
The word I'm hearing is that Bank's have itchy trigger fingers resulting in pro-bank loan restructuring or even worse good companies or real estate deals being put in work-out. Loan restructuring usually means higher interest rates, higher fees, and tighter covenants - not to mention the legal costs to change the agreement.
Worse, Most if not all Banks are in the retrenchment mode when it comes to financing capital expenditure investments - especially to those companies that have tweaked the credit agreement. Short pay-back periods, production cost reductions, competitive advantage are reasons to invest in capital expenditures, however, those justifications are falling on deaf ears.
One local borrower - who wants to remain anonymous - mentioned in frustration: "We're just not getting any help from our Bank?".
What can you do? Unfortunately, the only way to make a Bank move on your request is to threaten to leave the Bank. Suddenly, everything makes sense to them - short payback periods, cost reductions leading to increased cash flow. Its sad that it takes that kind of threat given your perceived relationship between you and your Bank.
To accomplish this and to make the threat real, you should always keep other Bank loan officers at your beckon call. Also, you should prepare a financing package way in advance. Time is of the essence. Don't worry about crying wolf regarding threatening to leave or bringing another bank down the prim rose path because many bankers are like the caged mouse eating cheese only to be electrocuted. They keep coming back for more. My gut would time to choose the one banker that actually calls your bluff because he or she is truly has good business sense.
Submit your monthly, quarterly, annual financial information on time - meaning under the allotted time in your credit agreement. While seeming insignificant, being one day late submitting your financial statements is a technical default, immediately bringing your Banker to the restructuring table.
These are trying times for borrowers. Your Bank has become very transactional, versus, relationship driven. Meaning that you can throw away the past 15 years of on-time payments. If your having trouble, I would suggest also getting your attorney up to speed on your current issues. Then read the definition of the "Default Rate of Interest" in your credit agreement. Its not unusual to see your rate increase by 4% over night.
Good Luck.
Wednesday, August 20, 2008
Monday, August 18, 2008
Its been a long time and I Apologies!
April 16, 2008 was my last post. Since that date, much has change in the commercial loan market and myself. One of the things that I've come to realize is that real estate investors and commercial business owners need more help than ever before with finding financing.
Abandoning these two important economic gas petals to the economy is not the right answer. Hiding behind a tough if not impossible commercial loan market is not the answer. I apologize for using these excuses as a way out of finding hard fought solutions for customers and prospects. You deserve better.
Now that I have that off my chest. The Commercial Loan Market is more strained and declining than the media is letting on. I laughed in a way that hid my nerves when I read recent news articles by local institutions such as the CBIA, and the SBA. Those two articles suggested that lending standards have not been tightened and in fact the Bankers polled in the articles suggested that they see customers and prospects being more cautious about future business expectations and therefore are postponing capital expansion. Sure, its not their fault, its the business owners not asking for loans!!!
Well I'd like for them to meet a successful owner of a insurance agency (been in the insurance business for over 30 years) in Hartford County who was looking to refinance an adjustable rate mortgage on her building. A mortgage rate that was adjusting to upwards to 13% as of this post. This person's credit was ok, not great, but enough to show that this person could handle their obligations. As of right now, this person who has a successful business and good personal credit can't find a loan to help the business stay competitive. The owner is approaching the point of laying of customer support staff because of the rising mortgage payment.
I'd like for them to meet the owner of an auto painting shop who has good credit, and has been in business for over 15 years and is an institution in his community. Finding a lender to refinancing him out of a hard money loan currently paying 12% has been impossible. This owner is worried about the current lender foreclosing on his property because the loan has matured. Each month his current lender charges the owner a $4,800 fee for not paying of the loan. All the lenders solicited to look at this loan avoided this loan like the plague. He employs six full time mechanics that he might have to lay-off because of his financial situation.
I'd like for them to meet a young entrepreneur that owns three commercial properties on a main street in a busy town. He owns a robust service business and his credit has been damaged by a dishonest residential loan broker who convinced this person that his personal mortgage refinance was going to close soon so don't pay your current mortgage. Well that is financial disaster for your credit report. Two of the commercial properties were leased out and cash flow positive. He wanted money for the third to bring it up to code so he can lease it out. He was asking a low Loan to Value on the properties that were already leased and cash flow positive. No dice. Lenders look for any excuse to say no - often times taking months to finally say no. They look at the personal credit and walked away. There so many reasons to justify the loan, but they needed only one to decline the loan.
Large borrowers aren't immune to what's going on. I've gotten calls from many of my old banking customers telling me that their banks are no longer funding capital expenditures required for future growth or required cost savings. Many of these companies employee well over 200 each. The lack of financing has further caused a business contraction and potential lay-offs.
So don't tell me that the credit crunch hasn't hit main street. I'm sure the business owners mentioned above where not asked in the polling conducted by these media institutions. I have an idea. Speak these business owners after they have to lay-off productive, important people because they are trying to meet their current loan payment that increases 15% a month.
The credit crunch is real, its here, and won't be gone for a long time. I know a lot of bankers that are telling me privately that their Bank's have posted "Closed for the Summer and Winter" signs on the Commercial Lending departments. Let's hope they might be open for the spring!
Abandoning these two important economic gas petals to the economy is not the right answer. Hiding behind a tough if not impossible commercial loan market is not the answer. I apologize for using these excuses as a way out of finding hard fought solutions for customers and prospects. You deserve better.
Now that I have that off my chest. The Commercial Loan Market is more strained and declining than the media is letting on. I laughed in a way that hid my nerves when I read recent news articles by local institutions such as the CBIA, and the SBA. Those two articles suggested that lending standards have not been tightened and in fact the Bankers polled in the articles suggested that they see customers and prospects being more cautious about future business expectations and therefore are postponing capital expansion. Sure, its not their fault, its the business owners not asking for loans!!!
Well I'd like for them to meet a successful owner of a insurance agency (been in the insurance business for over 30 years) in Hartford County who was looking to refinance an adjustable rate mortgage on her building. A mortgage rate that was adjusting to upwards to 13% as of this post. This person's credit was ok, not great, but enough to show that this person could handle their obligations. As of right now, this person who has a successful business and good personal credit can't find a loan to help the business stay competitive. The owner is approaching the point of laying of customer support staff because of the rising mortgage payment.
I'd like for them to meet the owner of an auto painting shop who has good credit, and has been in business for over 15 years and is an institution in his community. Finding a lender to refinancing him out of a hard money loan currently paying 12% has been impossible. This owner is worried about the current lender foreclosing on his property because the loan has matured. Each month his current lender charges the owner a $4,800 fee for not paying of the loan. All the lenders solicited to look at this loan avoided this loan like the plague. He employs six full time mechanics that he might have to lay-off because of his financial situation.
I'd like for them to meet a young entrepreneur that owns three commercial properties on a main street in a busy town. He owns a robust service business and his credit has been damaged by a dishonest residential loan broker who convinced this person that his personal mortgage refinance was going to close soon so don't pay your current mortgage. Well that is financial disaster for your credit report. Two of the commercial properties were leased out and cash flow positive. He wanted money for the third to bring it up to code so he can lease it out. He was asking a low Loan to Value on the properties that were already leased and cash flow positive. No dice. Lenders look for any excuse to say no - often times taking months to finally say no. They look at the personal credit and walked away. There so many reasons to justify the loan, but they needed only one to decline the loan.
Large borrowers aren't immune to what's going on. I've gotten calls from many of my old banking customers telling me that their banks are no longer funding capital expenditures required for future growth or required cost savings. Many of these companies employee well over 200 each. The lack of financing has further caused a business contraction and potential lay-offs.
So don't tell me that the credit crunch hasn't hit main street. I'm sure the business owners mentioned above where not asked in the polling conducted by these media institutions. I have an idea. Speak these business owners after they have to lay-off productive, important people because they are trying to meet their current loan payment that increases 15% a month.
The credit crunch is real, its here, and won't be gone for a long time. I know a lot of bankers that are telling me privately that their Bank's have posted "Closed for the Summer and Winter" signs on the Commercial Lending departments. Let's hope they might be open for the spring!
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