In spring 2010 I addressed the difficulty of obtaining credit. A friend had asked about the current environment so I am sharing my thoughts with all of you. Hard to believe that so much time has passed so quickly since I last wrote about credit. Before you know it, the year will be 2020, and we will have emerged from these economic shackles of debt and unemployment. But back to the issue at hand – credit availability in the current economic climate.
The banking industry continues to struggle with undercapitalization caused by poor lending practices and further compounded by the economic downturn. Most major banking institutions have recovered but some are still grabbing headlines. The community banking situation remains the same. Those that are undercapitalized are having difficulty raising equity; therefore, capital solutions are being solved by mergers, acquisitions, or earnings, the latter of which is a long road to health. However, since bankers have been operating under this difficult environment for years, they seem to be maintaining their stamina as if running a long distance race. Bankers realize that they need to make loans again and go the distance to grow the top line – revenues.
For the past six months we have witnessed most banks becoming more aggressive in the marketplace. “Aggressive” being defined as marketing more heavily to potential borrowers than in 2010. The underwriting can be described as conservative or constrained. When I was in banking, the joke was that we would only lend an umbrella when the sun was shining. This is a good analogy for today’s lending climate. However, I am seeing umbrellas offered even in some sun showers.
Bankers are now more lenient with borrowers who experienced poor performances in 2009 and the early part of 2010. Despite this understanding, lenders are requiring borrowers to show steady improvement in expense cutting, revenue growth and profitability to obtain loans. This is all good news as bankers are becoming more realistic about corporate performance.
Another trend we have noticed is the bank’s insistence on at least a one-year budget, if not multi-year budgets. I have heard numerous bankers comment that they are using these budgets to guide discussions during the year, especially at the annual renewal time.
A sign of the improved bank lending market is the increased activity of private equity and mezzanine funds. The PE funds were mostly on the sidelines during the credit crunch of the past few years since leverage is vital to achieving the desired returns. As the lending environment improved so did the activity from equity and mezz funds.
Another reason for increased lending activity these past 18 months was the certainty and confidence-building in the corporate arena. Unfortunately, within the last few months, stability and self-assurance has begun to erode.
While our individual influence on U. S. and global economics is slight, borrowers do have strong sway on individual borrowing needs. The basics of borrowing have not changed and still hold true especially in these economic times. Be truthful and open with your banker. Present clear and correct financial statements. Provide a solid understanding of your future path – operations as well as financial. Be realistic. This is not the time for “irrational exuberance.”