Global Credit Crunch Hits Business

Business is Unable to Secure Needed Funding for Operations

Jan 28, 2009

The public is not the only group experiencing a credit crunch. Business is having a difficult time accessing needed credit, making the global recession even worse.

The public’s credit woes have been well documented in the print and broadcast media but lurking in the shadows, not receiving much attention at all, is business’ inability to access credit for operations. This banking and liquidity crisis affecting business serves to magnify the problem the public is experiencing. The longer this crisis continues, the longer the unemployment lines will be.

Types of Credit Needed

There are seven basic types of credit facilities business needs in order to finance continuing operations:

The Price of Market Volatility

While most businesses are planning on a recession that lasts 12 to 18 months, even the strongest and most credit worthy are experiencing banks' reluctance to lend coupled with increasing difficulty accessing the capital markets. The combined crisis of liquidity is manifesting itself in the expansion of basis risk; i.e., the difference between sovereign debt and the interest rate, or price, of corporate debt.

The consequence of this marked increase in pricing has impacted short-term credit, such as revolving credit facilities and commercial paper as well, which inhibits a company’s ability to fund its operations and keep people employed. The problem in accessing the longer term market for term loans and long term bond issues has manifested itself in business being unable to make capital equipment investments to stay competitive and grow their business.

What Banks Must Do

If banks have a pessimistic view of their business clients, business has an equally dismal view of their banks. Most companies have a wish list of requirements that they would like their banking relationships to have.

The Merging of Commercial and Investment Banks

Consolidation of commercial and investment banks is not new. From time to time, usually in difficult economic periods, there is an increase in mergers and acquisitions. There was a time when there was a clear dividing line between the two but no longer. Each viewed the other with envy and the rate of mergers subsequently increased.

With banking consolidation continuing unabated, businesses will have progressively fewer lead banks and fewer choices to choose from both domestically and internationally. While the skill and financial acumen of commercial and investment banks is pari pasu, the problem is the unquantifiable difference in mentality. The two do not think the same and the propensity to assume risk is quite dissimilar.

Some Food for Thought

Government regulators may very well have their hands full for a very long time. While addressing the immediate credit needs of business and consumers is important, perhaps changing the rules and regulations banks operate under is just as so.

The copyright of the article Global Credit Crunch Hits Business in Business Financial Planning is owned by Dean Lundell. Permission to republish Global Credit Crunch Hits Business in print or online must be granted by the author in writing.