Thawing Credit Markets Begin Drowing Survivors...

A quick note before I launch into the nuances of accessing business credit in the current climate... According to AP, as of July 15 Denny Hecker has obtained a $100,000 line of credit for a new business venture. Has it even been one month since he declared personal bankruptcy? Ok, so he's got connections, (some things never change), but for the rest of the business community out there, credit is a problem.

Recently, there is a general sense of renewed optimism for economic growth and an upturn in stocks.


Yes, the US economy has survived, big surprise. Dumping trillions of dollars (proceeds of new goverment debt) on any financial problem is a sure fire short term solution.

Small business (under $25 million annual sales) and lower middle market ($25-$50 million annual sales) financing is a staple of our economy. Availability of credit to these markets is crucial to a sustainable recovery.

Here are a few (abbreviated) examples of what thousands of business owners with credit lines are currently hearing from their banks:

1) "The bank would prefer to lend 40% against your inventory instead of 80%, effective tomorrow".

2) "The value of your house is cut in half since we last talked, we need to cut your credit line back by $500,000".

3) "Would you mind telling your customers to send their payments to the bank directly?"

Business loans are primarily made by "small" community banks and specialized departments of large banks. In 2009, how do government actions continue to impact these two sets of competitors?

Traditionally, small banks have followed the famed "3,6,3" rule defined as: Take deposits and pay 3% interest, lend the money out at 6% and be on the golf course by 3 pm. To be fair, lets remove the illusions about these seemingly soft, denizens of the dollar. The individuals running these small banks (99% are privately owned) have their own capital at risk, understand the value of a dollar and usually know more about what is happening in town than the 911 dispatcher, the local attorney and the barber all put together. The local bank has the ability to judge the prospective borrower based on character as well as financial statements. Do I sound like I am describing a prehistoric business model in the evolution of economics? The answer may be yes...But having the best information still works! These bankers have their money where the mouth is. They recognize a tough business environment...And just try getting a loan today...

Contrast to the Wells Fargos and US Banks of the world. When you walk into one of these institutions for a loan you may think you're at Macdonalds. You get in line, someone takes your order for a loan, another nice person inputs your info into a gigantic computer system which eventually spits back a result. From your view point you may not see the chain of events leading up to loan funding or what happens after. Behind the scene, the government is providing loan guarantees so these loans can be packaged and sold for a premium. In some cases, if these bigger banks make an excessive abundance of bad loans the government simply provides direct capital!

So don't be fooled. Bankers that have their own money on the line are skittish. These "government enabled" big banks will continue their legacy of making bad loans at the taxpayers expense. It's just another handout that is unsustainable in the long run.
P.S. The above only addresses loans to operating companies (think employers). None of the potentially negative* statements above address the continuation of the real estate plague and associated financial debacle. That is a topic for another day.

*Subjective terms in this context, such as "negative" or "postive" must consider your reference point of reality. If you believe reality is that a nuclear blip will evaporate the planet within minutes, the fact that I am discussing credit markets is acutually an optimistic view point. :)


The Good, The Bad & The Ugly

The Good

There are good things happening... Adam Smith would be proud. 2009 is the beginning of a new, underground, service-based economy. Like a horde of awful Cicadas emerging from the soil after 17 long years, the new venomous entreprenuers of 2009 feast on the corpses of rotting corporate giants. They will be further fueled by an astonishing new generation of technology where dissemination and accumulation of data is the opportunity. They need no financing, capital requirements for the service sector are minimal. That talent is leaving the corporate world in droves is evidenced by strong levels of new business formation. These people are not going back. They don't want to. They can't. The new economy requires a lean business model. (Oh, I forget to mention you should have both lower prices and better service than any of your competitors if you expect to stay in business...it is a jungle out there.)

Bottom Line: There are opportunities out there if you are scrappy. Putting your money into the stockmarket? Suit yourself and buyer beware.

The Bad

It's amazing. History repeats itself. Watch... see it happened again!

The government stimulus does not stop, its getting bigger. As long as there is a lender, the US Federal Government will be a borrower.

The real estate/commodity bubble from 2005-2007 was financed by an unprecedented injection of cash flow into the bloodstream of US consumers until even the flakiest banks/realtors/developers/investors/regulators/homeowners/etc. could not be convinced that the market had further upside potential.

Today, witness the US government experiencing the 14th consecutive month in June 2009 of declining revenues; at the same time preparing to increase the debt load. It sounds oversimplified, but amazingly the US Goverment is following the identical model which we now call the "mortgage credit crisis". The government's "debt/income" ratio is off the chart. And it's lenders will soon wise up.

Bottom Line: Look Out. The government's loan payments will be due soon... who is going to pay?

The Ugly

Sorry in advance to you blue blood types out there, but you make such an easy target :)

Meanwhile, there is a totally seperate class of market participants getting richer. The big money in this country is getting bigger (unless you are Bernie, Denny or Tommy). Bank lending is increasing slightly, but the borrowers are primarily well heeled entities taking advantage by scooping up cheap assets. It's like shooting ducks in a barrel, for those of you from Up North. Trust fund babies... breathe easy, your future is becoming more secure as we speak.

Bottom Line: The sure thing, easy money is being made now by those with deep pockets.