Credit Conditions Worsening for US SMEs

Legislators working to overhaul regulations of the nation’s banking industry should keep one important fact in mind as they weigh the potential costs and benefits of various reform proposals: credit conditions are not improving for small and mid-sized US companies – they are getting worse.

The results of a new Greenwich Market Pulse from Greenwich Associates show that 58% of small and mid-sized enterprises (SMEs) that negotiated a new loan or refinanced an existing loan in the past three months say it was harder to borrow money during that period than it was a year ago. A striking 36% of that group say it has become “much harder” to borrow. Twenty-seven percent say credit conditions have not changed over the past 12 months, while only 15% say it has become easier to borrow.

Forty-nine percent of the 560 SMEs participating in the study say banks’ continued unwillingness to lend has had a negative impact on their own business or that of similar companies over the past year. Twenty-six percent of these businesses say banks’ reluctance to lend has had a “significantly” negative impact.

In addition, more than a third of the companies report their businesses were negatively affected by each of the following: unfavourable pricing on loans, stricter terms/covenants and longer response times on loan requests. “The market is stuck in a destructive cycle,” said Greenwich Associates consultant Jesse Neumyer. “Banks cite an eagerness to lend to creditworthy companies. At the same time, the recession has taken a terrible toll on US companies, degrading their businesses and making them weaker candidates for bank loans.”

Eroding Trust

The official end of the economic recession in the US and a year of strong recovery in global financial markets have failed to restore levels of trust between companies and their banks. Less than 15% of US SMEs say their trust in their banks has been enhanced over the past six months. Approximately 60% of companies say trust levels have remained unchanged over that period, and about a quarter say their trust in their banks continued to deteriorate over the last half of 2009.

The results of the Greenwich Market Pulse show that companies’ difficulty securing credit is the main driver of this continued erosion of trust. Business executives are not blind to the realities of the banks’ current situation: 61% of survey respondents say it is acceptable for their banks to impose stricter loan terms and covenants given the current economic situation. However, almost 55% of the companies say their banks have done a poor job in adjusting credit terms and pricing to match the conditions of the current environment, and a comparable share think it is unacceptable that their banks are taking longer to process and respond to loan requests. (Forty-six percent of small and mid-sized businesses expect replies to credit requests within two to three days; 28% expect a response in four to seven days.)

Turnaround Ahead

Despite this widespread dissatisfaction, approximately three-quarters of small and mid-sized businesses say they have not changed the amount of business they do with any bank due to trust issues. The reasons: fear of moving away from their known provider during a delicate time, as well as many companies do not see competing banks as being better options. Expect that to change later in 2010, however, as companies’ business begins to pick up and individual banks start to increase loan volumes at varying rates.

Banks looking to preserve existing relationships and increase their appeal to prospects in search of new options should keep in mind that, while credit is the primary issue in the minds of most small and mid-sized businesses today, strong customer service can have a significant impact on their relationships with business clients. “Among the roughly 15% of small and mid-sized businesses who say their level of trust in their banks has increased over the past six months, almost 56% attribute this improvement to customer service – nearly double the proportion attributing the enhanced levels of trust to changes in bank credit policies,” said Greenwich Associates consultant Don Raftery.


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