Why have banks stopped lending?

If your company has a revolving line of credit at a bank, credit union or other federally insured financial institution, you may find that renewing that credit is not as easy as it used to be. In fact, you may have already heard from your bank that it wants to reduce your line of credit or that it is requiring more collateral. Why won’t your bank do today what they were willing to do last year?

The answers are complex. In the fall of 2008, the secondary market for all types of financial transactions practically disappeared overnight. You may have heard the terms “collateralized debt obligations” (also known as “CDOs”) and “mortgage-backed securities.” These are just two names given to products that financial institutions and investors used to trade among themselves, through Wall Street brokers, that provided liquidity to the financial markets. Essentially, banks originated products like mortgages, real estate loans and commercial loans. Banks then packaged these products with others and sold them in the form of securities (hence the term “securitization”) for cash in the secondary market. Often, the rights to service these products were retained by the originators, but the underlying assets were not. With the cash generated from the sale of these assets, banks made new loans.

When the subprime mortgage debacle hit full force in 2008, the markets for other types of securitizations also fell apart, leaving banks unable to sell off loans they originated. Without a market to sell off these loans, there became a log jam that has come to be known as the credit crunch of 2008. The credit crunch had a profound impact on collateral values, so borrowers’ equity in their collateral vanished, leaving less margin against which banks could lend. Banks suddenly found themselves without the ability or the desire to make new loans or renew existing ones.

If your company has a line of credit and the primary collateral is accounts receivable, you may consider adding factoring as a tool to raise additional funds for working capital or for expansion capital. Interstate Capital can analyze your commercial accounts receivable, determine the value and advance your company funds to pay off your line of credit and make additional funds available to your business.

Author: Tony Furman
Copyright 2009
Interstate Capital Corp.

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