We hear so much about the collapse of the U.S. sub prime residential market, but we don’t hear a whole lot about what I refer to as the global business sub prime lending market.
For business financing, there are three basic levels of financing. The first level is for “A” credit and where corporate finance mostly lives. Then there is the “B” level or sub prime level for slightly higher risk situations followed by the “C” credit level which is asset based lending. There can be forms of asset based lending that are more A or B in nature, but for the most part asset based lenders lend strictly on the liquidation value of the assets.
In March of 2010, the “A” type lenders are still largely sitting on the fence and not lending out much money. Most of their time is being spent trying to figure out what to do with all the customers that are behind or offside with their financing covenants.
The C lenders are lending, but the rates are high, and because their is so much used equipment and real estate flooding the market, the assessment of liquidation value, upon which the amount of financing that can be provided is determined, is very low producing much lower amounts of capital than the business owner is expecting in most cases.
And then there’s the B, or Sub debt lenders, who have basically vanished from the scene.
So right now, if you’re a business that just come off a bad year, but have pretty good options ahead of you, the types of financing options available to you are going to be limited. In most cases, the only options that are actually lending money will be asset based lenders, and they will be taking a big bite out of your available equity with large debt service costs.
Business owners, for the most part, have not adjusted to this market shift and are still looking for cheaper money that isn’t available right now. It is a hard decision to take on higher priced debt, but if you can make the math work in your cash flow, 2010 may be more about survival than profitability.
If you are in need of business financing, give me a call and we can discuss your options in more detail.