Business Credit Availability

Is Business Credit Availability oxymoronic?

I recently assisted three businesses in obtaining financing, and I am assisting a fourth company with its financing needs at the present time. Let’s highlight each example and then you tell me if you think there is credit available to small and medium sized businesses.

The first company obtained a 90% Small Business Administration (“SBA”) 7(a) loan. Securing the loan is a first lien on all business assets, life insurance on the owner, a subordinate lien on the owner’s personal residence, the owner’s personal guarantee, and a 90% guarantee from the United States government. The 90% SBA guarantee was a limited time only program. If the company did not make the deadline for this program, the lender would not loan money to this company – even with a standard 75% SBA guarantee.

The second business is a government contractor that has been in business for many years. They needed a working capital line of credit. Advances would be secured by eligible United States government accounts receivable. They were able to obtain the line of credit they required, secured by all business assets, the personal guarantee of the owner, and a second lien on the owner’s residence with twice as much equity as the amount of the line of credit.

The third client also obtained a line of credit. In addition to the standard collateral package referenced in the above examples, the lender also secured its loan with an abundance of commercial real estate equity.

We now get to the final case. I cannot provide too much detail due to confidentiality issues, but you’ll get my drift. A company in a depressed city in the Midwest renovated a structure. For this example, let’s assume that the appraisal performed last year stated the “as completed” value of this structure at $100. The recent appraisal obtained indicated the value at $50. The company is the sole tenant and operating business in this building. The business generates more than adequate cash flow to service the debt, has never been in default, and is in compliance with all loan covenants.

Due to the declination in appraised value from last year to this year the lender wants the borrower to set aside 75% of its free cash flow in a separate account as additional collateral. I guess the borrower should be thrilled that the lender didn’t merely ask to receive half of their loan proceeds returned because of the 50% declination in appraised value. However, how can a medium sized business survive, much less thrive, when 75% of its free cash flow is being taken away from the entrepreneur. The bank is telling the client that the regulators require this action.

The Administration continues to tell banks to loan money to businesses. Banks claim regulators criticize loans, even ones where cash flow is sufficient to service the loan, if collateral values have declined due to the recessive economic environment we have encountered.

Is Business Credit Availability oxymoronic?

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One Response to “Business Credit Availability”

  1. Commercial Finance Advisors, Inc Says:

    Nice topic. To me it seems the feds want to be rid of smaller community banks and are forcing ridulous standards on them. The capital reserve ratios are doing a lot of damage. Do we really only want huge banks in this country?

    And its hard to stomach how much bs the politicians spue when they “encourage” banks to lend in the media, than hammer them behind close dorors. I should know better by now.

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