Financial Musical Chairs

By: Kenneth P. Walsleben
Date: 10/5/2008

As I pen this article, it's Black Monday and over the weekend world-leader AIG Insurance teetered, Lehman Brothers failed and filed for bankruptcy, and the iconic Merrill Lynch fled into the waiting arms of Bank America. Pretty sobering stuff! And all of this on top of last week's federal bailout of Fannie Mae and Freddie Mac.

But the distinct possibility exists that by the time you read this missive, further terrible things will have occurred in the financial markets. As of today in the bloody aftermath of this weekend, some sages are predicting the bottom of this crisis, while still others suggest that similar fates await Washington Mutual and others in the days ahead.

You may be tempted not to worry if you don't do business with any of these institutions. You'd also be dead wrong if you did. These names are among the biggest of the big. It once was assumed that they were too big to be buffeted by the winds of financial crisis. Some of you may be worried that your bank could be next, while others remain comforted by the so-called domino theory of financial firewalls. The reason you should be worried may surprise you though.

I'm worried for you about the change in banking climate that is occurring regardless if any other institutions fail. Just last week, before the weekend's carnage, CFO magazine reported upon the trends already developing amongst the commercial lending markets nationwide. As you may know, CFO is no internet blog trash, but rather is a well respected trade journal that is the bible of financial officers everywhere. If any periodical has its fingers on the pulse of corporate finance, it is CFO magazine.

CFO reported wide spread negative changes occurring amongst lenders even before this latest crisis. They reported that credit facilities are very hard to get these days for borrowers of all sizes, that credit lines with unused borrowing capacity are being routinely trimmed, and that in addition to a flight to quality by lenders, borrowers can expect lenders to tighten collateral requirements. This last part is what I'm worried about.

Until recently, borrowers in your industry could entice banks to loan you money even though your collateral was, in their eyes, substandard. You see, your primary form of corporate collateral is accounts receivable. In the eyes of a lender this is substandard when compared to equipment, property, or inventory. Now those items you can touch and feel and lenders like that. A lot. But accounts receivable? Let's just say that to be of any value to a lender, they must control it and know how to collect it. Most bankers figure that at best, they'll get 25 cents on the collateral dollar if they ever needed to actually collect receivables after a default.

You may not yet realize it, but in coming years , this past decade will be viewed as the 'good old days' of easy borrowing. Lenders routinely ignored the stern advice of their forebears and loaned capital with abandon. So long as most of your borrowing criteria were sound, they'd look past any blemishes they considered inconsequential. Not anymore. Now, poor collateral criteria will torpedo many more loans than you can imagine.

Many of you reading this have come of age thinking that local commercial banks were the answer for all forms of commercial borrowing. Unless something profound soon occurs, those days are over. I predict a stratification of lending sources. You'll see the emergence of asset based lenders for inventory and equipment needs. You'll see the emergence of Factors for cash flow funding of liquid collateral such as accounts receivable. Amidst this market contraction, many borrowers who heretofore viewed their bank borrowing relationship as stable, will learn otherwise. More than a few of you will learn that your bank is "moving in a different direction" as they refuse to renew or grow your credit line. I don't need to tell you what that will mean to your corporate growth prospects.

My advice? You better have a solid back up plan ready to go. In previous columns I've urged readers to be proactive, I've urged you to get out of denial and earn your management stripes by developing financial contingency plans. The need for those actions appears more critical today than ever before. Staffing firms better affiliate with a factor or other asset based lender before you lose control of the timing of such a move. Doing otherwise is like playing musical chairs with ear plugs! You'll never know when the music stops until it's too late. Secure your financial future, get in touch with an alternative financier soon. Someday pretty soon you'll be glad you did.

Ken Walsleben is a Principal of The Hamilton Group. He can be reached at 800.351.3066 or Ken@hamiltongroup.net.

Ken Hamilton can be found at www.hamiltongroup.net