Business Lending 2010
I recently attended two different lender symposiums through the TMA to learn more about the struggling mid-middle market commercial lending environment.
Step #1 in this process is understanding the Amend and Extend practice that many banks are currently following with their business credits. I wrote on this in a previous column but this guy does a better job of explaining it than I can. http://theturnaroundcontrarian.blogspot.com/2010/07/zombie-banks-marching.html There are plenty of zombie business credits out there just bumping along. Credits that would have been sold off or liquidated 3 years ago are now being propped up by "soft notes", forbearance terms, interest only payments and other tricks to keep your credit on the banks' balance sheet. As one lender told me; we'll just keep them here and fee them (to death). Another bank President told me yesterday; "...we'll keep folks on the books while we drain every last penny and then sue the owner personally for the shortfall".
Hope is rising as banks are increasingly willing to take "haircuts" to exit a loan. 6 months ago I saw a bank balk at an 80% recovery. That same bank is now realizing a 40% recovery, with risk. This is not widespread but is the market direction.
Who takes these loans off the banks hands? Often its asset based lenders (ABL) but they rarely ever find a bank loan that is properly collateralized. These are risky loans with unbankable businesses. As one ABL lender told me the other day when he was joking about his interest rates; "I don't even know how to spell Libor". Instead you are looking at 15% - 20% money secured by personal guarantees, lock-boxes, covenants and possibly 3rd party oversight of your financials. At best, this is only a reasonable short-term financing strategy and these lenders know that.
Even at these rates, it takes one heck of a story to get an ABL loan. It also takes about 6 months of straight profit and good trends. The right turnaround consultant can bring the money in with less positive history but these days, it's like pushing water uphill.
But banks need to grow. It used to be that they would kick out the bad loans and just go make new good ones to move ahead. Well, those days are over. Every single lender at the conference was having another lousy year. They just can't find strong businesses to lend to and now they have to keep the bad loans so they don't lose ground.
The bottom line; Stay Bankable. "Bankability" may be a moving target with your current lender but an open dialogue and transparency will give them the opportunity to coach you towards that target if needed. There is financing available even for challenged businesses in this economy if you know where to look.
Jeff Sands is a Director with Dorset Partners LLC (www.DorsetPartners.com) which helps companies Revitalize in the face of serious economic challenges.