Vigilance Is the Watchword in Today’s Credit Markets

By John T.H. Carpenter, Cherry, Bekaert & Holland, L.L.P. (CB&H)
Email: jthcarpenter@cbh.com

One would have to have been living the business life equivalent of Rip Van Winkle in order to not be aware that today’s credit markets are undergoing the most drastic upheaval since the early 1990s. What began this summer as a shutdown of the subprime mortgage market has spread to the large corporate leveraged loan market, the markets for credit cards, student loans, equity lines and auto loans. The market meltdown has also brought on the firing of CEOs at two of the world’s largest financial services companies (Charles Prince at Citigroup and Stan O’Neal at Merrill Lynch).

Although almost every credit product market has been touched in some way, the small business and middle-market commercial and industrial loan market has seen only minor tweaks as opposed to full-scale shutdown. For every small and middle-market business owner, now is a great time to proactively manage your company's lending relationship to be prepared to react to changes.
Do a careful evaluation of your credit needs for the next year or two. Turbulent times like these call for careful planning, including thinking through multiple “what if” scenarios.

Discuss your credit needs with your lender giving them plenty of advance notice. Did you have a credit planning discussion with your lender six months ago? Then it's time for an updated discussion. Don’t assume that the answers you received six months ago are the same ones that you will get today.

Make sure you have a detailed understanding of how credit is approved within your lender’s organization. At many banks, the “relationship manager” that you deal with is more responsible for cross-selling bank products than getting your credit needs approved. Ask detailed questions about how loans are approved within the organization. Request a face-to-face meeting with the credit underwriters and approvers (if they are located in another city, this may be difficult or impossible). If you have never met them, invite them to your place of business for a light lunch and management meeting. Credit underwriters generally gain a better appreciation for your business if they can put faces with names.

Do a little research into your lender’s financial performance. Almost all banks have seen their stock prices take a hit this year. Read the latest quarterly earnings reports and stock analyst reports about your lender (these are almost all available on Internet sites, such as Yahoo! Finance). Try to gauge whether your lender is going through particularly tough times compared to others.
Not getting the “warm fuzzies” when discussing your credit needs? Might be a good time to explore financing options with other providers.

Don’t be like Rip Van Winkle and fall asleep! Experts predict that credit markets will remain tight at least until late 2008. With some extra vigilance and careful planning, you will be prepared to navigate the rough waters ahead.

John is a Principal with CB&H and a member of the Firm's Government Contractor Services Group.