According to a July 2nd article written by CFO.com, banks across the U.S. are dramatically tightening business revolving line of credit availability and raising pricing.
The article explains that refinancing rates are higher when a borrower asks its bank to refinance its revolving line of credit. CFO.com cites CreditSights, a firm that tracks various commercial lending activity, indicating the average rate increase from existing line-of-credit relationships increase by 200 to 400 basis points. Presumably banks are arguing that risk is higher and supply is down, which are both true. Some banks that secure lines of credit with A/R and inventory may be worried that the value of collateral is somewhat compromised because of the general recession.
Corporate CFOs are also indicating that the time it takes to renegotiate an extension to a business revolving line of credit has substantially lengthened and the difficulty in negotiating with creditors has become even greater.
Also, the size of lines of credit are shrinking, according to the CFO.com article. Banks must report the unused portions of their revolving lines of credit as contingent liabilities which causes them some concern when regulators are looking at the bank’s liquidity. Banks have always been somewhat concerned about this contingent liability exposure, but with increased scrutiny by regulators, banks are taking the stand that they don’t want commerical borrowers to have any excess credit beyond what they need in external financing.
During the first quarter of 2009, unused portions of business revolving lines of credit shrank dramatically across the nation’s largest banks. The banks examined, including Bank of America, Citibank, and J.P. Morgan Chase, reduced their committed business lines of credit by hundreds of billions of dollars.
Lastly, during the first half of this year, new committments for business revolving line-of-credit loans dropped drastically, according to Reuters Loan Pricing Corp. In 2008 total issuance of new line-of-credit committments totaled $455 billion, while during the prior three years banks opened over $1 trillion in new line-of-credit commitments. During the first half of 2009, all U.S. banks combined only issued $163 billion in new line-of-credit committments, down from $292 billion in the first half of 2008.
What this means to small and medium-sized business enterprises (SME) is that you need to start early and plan on spending considerable time negotiating a renewal of your business revolving line of credit when it comes up for renewal.
Sam Thacker is a partner in Austin Texas based Business Finance Solutions.
You may contact Sam directly at: firstname.lastname@example.org
or follow him on Twitter: SMBfinance
EXTRA: If you have questions for Sam regarding business financing, the credit market, and similar issues, please send an e-mail. Your questions will be recorded and Sam will answer the best ones in his Ask the Expert podcast show.