Find out the financing solution

Find out the financing solution

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Read the Full Story

Read the Full Story

Big banks claim they have loosened available credit for small and medium businesses, but reality can be much different.

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That was one of the points made Wednesday morning during the closing panel of the fourth annual, two-day Midwest conference of the Turnaround Management Association at the Greektown Casino-Hotel.

Large deals involving big corporations, where borrowers are willing to pay high yields, will continue to dominate the world of capital raising and mergers and acquisitions.

“The high-yield market is absolutely on fire. In August it had the best month ever,” said David Andrews, managing director at Credit Suisse. “We’ll book $3 billion in high-yield deals this week in the just the energy sector, alone.

“If someone came up to me today and said, `I need to raise $50 million,’ I have no idea how you do that. If you came up to me and said, `I need to raise $500 million,’ I can do that,” he said.

Andrews said that the smallest high-interest-rate yield deal you can get done is about $125 million, and most are considerably higher. If you need less than that to fund growth, or buy equipment, finding a lender will continue to be difficult if you plan to base your loan on cash flow.

If you seek money based on assets, though, you’ll have a greater chance of success, to go with a higher interest rate.

“Cash-flow lending for small companies will remain difficult for the foreseeable future,” said Peter Mardaga,executive vice president of PNC Business Credit.

“Asset-based lending is the wave of the future,” said Thomas Aronson, co-founder and principal of Chicago-based Monroe Capital LLC. “The ABL guys are licking their chops.”

“At the lower end of the middle market, there’s not much credit, especially for a company without 24 months of good earnings,” said Steve Rosen, co-CEO of Chicago-based Resilience Capital Partners.

Rosen made it clear he was not criticizing banks.

“Bankers are doing the right thing. They weren’t getting paid for their risk. We’re seeing today what banks should be doing: pulling back a bit and managing their portfolios,” he said Rosen.

The panel said that concerns about the economy and at least two years more of low levels of home and commercial building will keep many lenders, particularly banks, conservative in their lending practices.

“Lenders say they want to put money out there, but they also want to wait and see,” said Aronson.

The panelists said that companies that have survived the recession have done a better-than-expected job of cutting costs and boosting productivity, particularly large corporations that have been reporting improved bottom lines.

But, said the panelists, with just about all the costs cut out that can be cut out, and about all the productivity per worker gained that can be gained — “productivity went through the roof,” said Andrews — companies will need to boost revenue to continue boosting profits, and that won’t be as easy as cutting costs in the face of a recession.

“To grow revenue organically is going to be a challenge,” said Mardaga.

Andrews said that there is a lot of schizophrenia when it comes to judging capital markets and the economy.

He pointed out that Wall Street analysts have predicted big increases in corporate profits for 2011, but at the same time have a record low number of buy ratings.

When panel moderator Kevin Carmody,managing director in the Chicago office of Southfield-based AlixPartners LLP, asked Andrews for his take on the economy over the next year, Andrews said:

“If you’d asked me that over the last 24 months, I’d have been wrong every time. You can find strong bulls. You can find hyperinflation guys. You can find deflation guys. Uncertain is real. You get two different views of the yen. You get two different views of the Euro. It will be at par in a year. It will be at $1.45. In other words, I don’t have a clue.”

Private equity companies will see a lot of deal flow next year, said the panelists, but there will be fewer buyers than sellers and expectations for big cash outs will need to be tempered if deals are to be done.

“There will be a huge pipeline of companies for sale in the market. How many of these assets will trade, we’ll see,” said Rosen.

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The problem is even with this, start-ups haven’t built up adequate credit history and banks are just not willing to give money to companies with no credit history. Without adequate money coming in, it is difficult for a small business to maintain payroll and pay its bills.

No wonder we keep reading the statistic that 85 percent of business start-ups fail in the first five years. Some research has indicated the reasons for these failures are a lack of funding and poor planning. These facts combined with today’s economy makes small business financing more important than ever.

Well, there are ways for small businesses to avoid funding issues and find alternatives for obtaining business financing. One method is receivables financing, also known as receivables factoring and invoice factoring.

Most U.S. banks kept credit tight in the first three months of the year, and some tightened lending terms further, according to the Federal Reserve’s latest senior loan officer survey.

Some categories showed improvement after years of lending cutbacks. Banks reported easing terms on commercial and industrial loans to large and medium-size firms. While the easing took place only at large banks, it marked the first time since 2006 that banks reported easing standards in two straight quarters.

Some consumer loans, such as home-equity lines of credit, also showed easing in standards. But key areas, such as residential mortgages and commercial real estate, saw continued tightening in terms.

The Fed found that a third of banks tightened terms and conditions on new credit-card accounts for small businesses, while more than a quarter of banks did so for existing accounts. More than 40% of banks said they raised minimum required credit scores. Almost a third said they widened spreads—interest rates over the bank’s cost of funds—on outstanding balances, and 15% reported charging higher annual fees. More than two-thirds of loan officers said their current level of standards and terms is tighter than their longer-run average.

Many small business customers, meanwhile, are cutting back on borrowing in part because of the weak economy. Noelle Tarabulski, who used credit cards to finance her Lakewood, Colo., consulting firm before the recession, relied on credit lines of up to $150,000 before her interest rates shot up to as much as 38% after the financial crisis. That came just as her revenue plummeted from $1 million in 2007 to about $200,000 last year.

“I’m just never putting myself in a position where a bank can do that to me again,” said Ms. Tarabulski, whose firm, Builder Consulting Group Inc., works on best practices for homebuilders. She expects about $600,000 in revenue this year but is cutting her debt as much as possible. “At this point my approach to credit is 100% different,” she said. “I have no interest in being leveraged at the level that I was. For me I think there’s a healing period going on.”

Businesses and households across the U.S. are trying to cut their debt and increase savings, spurring a continued drop in loan demand. The Fed said demand for prime residential mortgages fell at a third of banks surveyed, while it was stronger at a fifth of banks.

Chief Executive Brian Moynihan said during the company’s first-quarter conference call last month that loan demand remains weak because of overall economic conditions, as opposed to an unwillingness to lend. “Customers are not feeling the need to draw on our lines because they don’t see economic demand,” he said.

Outside of credit cards, some U.S. banks in the Fed survey reported easing standards and reducing spreads for consumer loans. About one in seven banks said they were “somewhat more willing” to make consumer installment loans compared with three months ago, while the rest were unchanged.

“The gradual normalization of bank credit supply and demand bodes well for loan growth in coming quarters, and the increasing availability of bank credit is slowly removing one of the remaining drags on the pace of recovery,” said Michael Feroli, chief U.S. economist at J.P. Morgan Chase.

By SUDEEP REDDY