On Friday of last week the Wall Street Journal had two articles, one on the front page and the other in the Money section, that taken together paint a chilling picture for the small and mid market companies. The front page article highlights the peril that local banks are in because of home builder loans. The jest of the article is that banks are going to have to cut back on their loans because of losses sustained by lending to home builders. So, what happens if the lenders of last resort are gone?
The other article highlights the plight of CIT. CIT is often a lender to companies whose bank has asked them to move their loan or are having financial difficulties. (By the way, I have had clients do business with CIT and have had excellent results. I can’t say enough good things about the company.) There are numerous small companies like CIT in the market place who perform a vital function in providing liquidity to financially stressed companies.
The question is where do the asset based lenders get their money from? The answer is: banks! Often, an asset based company or a factorer will leverage investors’ money with a bank line of credit. In times of easy liquidity in the market place this business model works fine. But what is going to happen if banks won’t lend as much? Liquidity dries up!
Today’s WSJ article describes how this business model may not work in today’s banking environment (page C1, “CIT Scrambles for Cash”). So what about the other smaller asset based lenders? They too should start having difficulties raising money. This could pose a problem if your bank asks you to move your loan and no one will take you!