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.

POLLYANNA, DO NOT BE FOOLED!

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. :)