I keep reading in the news that banks have loosened up on credit, but my experience over the past six months in my day job has indicated otherwise. Three years ago I would guess my overall success ratio for helping small businesses get loans from bank and non-bank lenders was over 80%. This year I estimate it to be about 25%. Yesterday, FDIC Chairman Sheila C. Bair yesterday explained why my ratios have gone down so far.
During a conference call yesterday, she indicated that the third quarter was the fifth consecutive quarterly drop in bank lending. I hear Obama administration officials and other banking experts say that the demand for loans is simply not there, and that banks would loan money if there was more demand. While I would acknowledge seeing a reduction in demand, I think that for those businesses seeking loans, average banks are simply saying “not right now.” The ones that are making proposals are doing so under such ridiculous terms that borrowers have little or no options.
I hear bankers every day saying their bank just doesn’t have an appetite for lending money to businesses with “stories.” A story is anything not highly positive in the business that must be explained. Here is an example of a story, “Last year, XYZ Corp had negative net profits of $150,000 on $9 million in revenue. The company had to spend $350,000 in one time patent infringement litigation costs. The company won their lawsuit and the other party, a Fortune 50 company has since settled the case this year, and will pay XYZ an ongoing royalty stream for infringement for the next 10 years.” The fact that XYZ is operationally profitable doesn’t help the banks feel comfortable. It is the simple fact that a non-operational loss suffered in a prior year means that the company could not meet the banker’s standards for having enough cash to meet a debt service coverage ratio (DSCR) for the prior period. The prior standard in banking was that the DSCR ratio was a snapshot of a business’ ability to cover its debts today and moving forward with a new loan. The ratio was never intended to be used retroactively to gauge whether a company could have been able to pay a non-existent debt it wasn’t applying for. Such is the thinking of bank loan committees today.
XYZ Company is not just a hypothetical example. It happens to be a real company that has been to six or more banks looking for a $2 million loan. It is profitable, can meet any bank’s DSCR moving forward, but did have non-operating losses last year. The company could have probably qualified for an SBA 7(a) loan, but the owners have too much combined personal liquid assets to be eligible for an SBA loan. One very large national bank came back to XYZ Company several days ago and indicated they would make the $2 million dollar loan if the two owners personally liquidated some of their stocks and bonds and converted them into a $2 million CD at the bank.
Let me get this straight. The company which is profitable, has enough business collateral to support the requested loan, can meet the bank’s DSCR moving forward, and has two very strong personal guarantors can only borrow money from a bank if it is 100% secured by a CD earning about 1% at a borrower’s interest rate of LIBOR (London Inter-Bank Overnight Rate) 1.75%? Worst of all, after looking for a loan for this business for the last 2 months, this offer is the best we have been able to obtain.
More and more I am seeing the kind of bank loan proposal where there is absolutely no risk to the bank. I guess the sins of the bankers are coming home to roost.
According to the FDIC, 50 banks closed in the third quarter. Institutional Risk Analytics, a company that measures banking industry trends on an A to F score shows 2,256 banks rating an “F,” out of 8,643 it currently has 3rd quarter bank call report data for. To state it another way, 26% of all banks reporting were experiencing significant difficulties at the end of the 3rd quarter.
To me, the answer is simple. Until bankers take care of their toxic assets including failing commercial real estate loans and increasing defaults of consumer credit card debt, we won’t be seeing banks focused on their future and loans for customers. They will be 100% focused on stopping the bleeding and stabilizing their bank’s wounds.
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