WASHINGTON—The recent economic upheaval and tight credit environment has brought with it new borrowing methods from companies.
In the search for lower-cost loans, small- to medium-sized businesses along with the banks that serve them have cooked up new ways to borrow and lend money. The latest trend in the search for funding is a “request for proposal” (RFP), which allows for a more competitive bidding process.
A RFP from a business is basically an invitation to banks to bid on providing the lending service to such business.
Traditionally, smaller companies have borrowed from the same bank for years. Recent research suggests that more than 10 percent of smaller firms have switched banks in the past year.
The crux of the matter is that borrowing costs have risen and firms can no longer afford them, according to Greenwich Associates, a global financial services consultant with broad research capabilities.
“In the context of that traditional average, the current rate at which U.S. companies are issuing bank RFPs is truly striking,” according to a Greenwich statement.
Most recently published survey results by Greenwich suggest that at least one-fifth of all medium-sized companies and around 15 percent of small-sized firms have sent out RFPs since the beginning of this year.
The survey respondents agreed that the number of firms trying to procure funding through RFPs will increase significantly over the next months as firms gain greater familiarity with this method.
The reasons for sending out RFPs, besides the cost factor, range from an increased demand for capital to borrowing at a lower rate before the economy improves and costs rise accordingly.
Businesses are also getting increasingly more irritated, as sources for funding have not materialized as hoped and banks have become more risk-averse, demanding all kinds of guarantees from even the most creditworthy businesses.
But “the single most important factor driving the spike in RFPs over the past 18 months has been corporate efforts to reduce banking fees,” according to the survey undertaken by Greenwich.
Business leaders have become increasingly more skeptical of a fast economic recovery, given the difficulty in procuring sufficient funding for operations.
Lastly, more than one-third of the companies that responded to the survey are unhappy with the service, response, unwillingness to lend the amounts needed for firms to grow, and risk adversity displayed by lenders.
“Although the share of companies looking to switch banks has increased dramatically since then [beginning of 2010], this activity does not seem to reflect new strength, but rather, increased frustration with current providers,” said Pete Garrison, consultant at Greenwich.
Bankrupt businesses put a strain on banks, which must write off the loan and take the loss.
During the first half of 2010, bankruptcy filings had risen by 14 percent when compared to the first half of 2009. ABI stated in a press release that such high bankruptcy rates have not been seen since 2005.
ABI predicts that at least 1.6 million more bankruptcy applications will be filed by the end of this year, which results in banks losing interest income and a large portion, if not the entire loan, has to be forgiven.
In 2009, close to 61,000 businesses filed for bankruptcy, an increase of almost 40 percent of bankruptcy filings over 2008; while in 2008, such filings had increased by more than 51 percent over 2007.
California, with almost 15 percent of all filings in 2009, had by more than double the highest bankruptcy filing rate in the U.S. Florida with 8 percent and Texas with 7.5 percent were in second and third place when it came to bankruptcy filings.
Jennings continued, “Banks will stay focused on loss prevention. Our survey found most bankers are still concerned about delinquencies.”
Even banks are becoming victims of the hard economic times, with 110 banks being shut down in 2010. Banks do not file for bankruptcy, but are shut down by The Federal Deposit Insurance Corp.
According to experts, the federal government has put millions of dollars in the hands of banks to jump-start lending, and it is not that banks don’t have the liquidity to provide loans to small- to medium-sized businesses. Alas, most banks park excessive funds in the Federal Reserve System or acquire smaller banks, instead of putting the money back into the economy.
It should be noted that Governor Duke served for years as a community banker with many years on the lending side.
The administration rolled out many programs through the U.S. Small Business Administration (SBA), putting working capital funds into the hands of small businesses.
In 2009, the SBA lending activities increased on a weekly basis by more than 60 percent after the creation of the Recovery Act.
Over 1,200 lenders that had not used the SBA program for an extended period of time availed themselves of the program again.
However, according to a SBA publication, the number of small business loans granted decreased by 55 percent between fiscal year-end 2007 and 2009, from 114,759 loans in 2007 to 52,093 in 2009.
“Overall, the Agency is renewing its commitment in FY 2010 to promote the growth, innovation and global competitiveness of the U.S. small business community as it leads the country out of recession and into recovery and prosperity in the 21st century,” said Karen G. Mills, administrator at the SBA.
In the search for lower-cost loans, small- to medium-sized businesses along with the banks that serve them have cooked up new ways to borrow and lend money. The latest trend in the search for funding is a “request for proposal” (RFP), which allows for a more competitive bidding process.
A RFP from a business is basically an invitation to banks to bid on providing the lending service to such business.
Traditionally, smaller companies have borrowed from the same bank for years. Recent research suggests that more than 10 percent of smaller firms have switched banks in the past year.
The crux of the matter is that borrowing costs have risen and firms can no longer afford them, according to Greenwich Associates, a global financial services consultant with broad research capabilities.
“In the context of that traditional average, the current rate at which U.S. companies are issuing bank RFPs is truly striking,” according to a Greenwich statement.
Most recently published survey results by Greenwich suggest that at least one-fifth of all medium-sized companies and around 15 percent of small-sized firms have sent out RFPs since the beginning of this year.
The survey respondents agreed that the number of firms trying to procure funding through RFPs will increase significantly over the next months as firms gain greater familiarity with this method.
The reasons for sending out RFPs, besides the cost factor, range from an increased demand for capital to borrowing at a lower rate before the economy improves and costs rise accordingly.
Businesses are also getting increasingly more irritated, as sources for funding have not materialized as hoped and banks have become more risk-averse, demanding all kinds of guarantees from even the most creditworthy businesses.
But “the single most important factor driving the spike in RFPs over the past 18 months has been corporate efforts to reduce banking fees,” according to the survey undertaken by Greenwich.
Business leaders have become increasingly more skeptical of a fast economic recovery, given the difficulty in procuring sufficient funding for operations.
Lastly, more than one-third of the companies that responded to the survey are unhappy with the service, response, unwillingness to lend the amounts needed for firms to grow, and risk adversity displayed by lenders.
“Although the share of companies looking to switch banks has increased dramatically since then [beginning of 2010], this activity does not seem to reflect new strength, but rather, increased frustration with current providers,” said Pete Garrison, consultant at Greenwich.
Bankruptcy Filings Scar Banks
In July, bankruptcy filings in the United States increased by 9 percent over the prior month, according to the American Bankruptcy Institute (ABI).Bankrupt businesses put a strain on banks, which must write off the loan and take the loss.
During the first half of 2010, bankruptcy filings had risen by 14 percent when compared to the first half of 2009. ABI stated in a press release that such high bankruptcy rates have not been seen since 2005.
ABI predicts that at least 1.6 million more bankruptcy applications will be filed by the end of this year, which results in banks losing interest income and a large portion, if not the entire loan, has to be forgiven.
In 2009, close to 61,000 businesses filed for bankruptcy, an increase of almost 40 percent of bankruptcy filings over 2008; while in 2008, such filings had increased by more than 51 percent over 2007.
California, with almost 15 percent of all filings in 2009, had by more than double the highest bankruptcy filing rate in the U.S. Florida with 8 percent and Texas with 7.5 percent were in second and third place when it came to bankruptcy filings.
Banking Sector Lending Trends
Banks have become more risk-averse, even to longstanding customers. “Bankers have a growing sense of optimism about the economy, but it’s clear that risk management and responsible lending will be top-of-mind,” said Dr. Andrew Jennings, chief research officer at FICO, a global business consulting firm, on FICO’s website.Jennings continued, “Banks will stay focused on loss prevention. Our survey found most bankers are still concerned about delinquencies.”
Even banks are becoming victims of the hard economic times, with 110 banks being shut down in 2010. Banks do not file for bankruptcy, but are shut down by The Federal Deposit Insurance Corp.
According to experts, the federal government has put millions of dollars in the hands of banks to jump-start lending, and it is not that banks don’t have the liquidity to provide loans to small- to medium-sized businesses. Alas, most banks park excessive funds in the Federal Reserve System or acquire smaller banks, instead of putting the money back into the economy.
Government Intervention
“I do not believe it is appropriate or even possible for regulators to urge banks to make loans that are outside their risk tolerance or that would be unsafe or unsound. But we can and should be sure that supervisory policies do not impede the flow of credit to all eligible borrowers,” said Elizabeth A. Duke, governor at the Federal Reserve, during a July meeting.It should be noted that Governor Duke served for years as a community banker with many years on the lending side.
The administration rolled out many programs through the U.S. Small Business Administration (SBA), putting working capital funds into the hands of small businesses.
In 2009, the SBA lending activities increased on a weekly basis by more than 60 percent after the creation of the Recovery Act.
Over 1,200 lenders that had not used the SBA program for an extended period of time availed themselves of the program again.
However, according to a SBA publication, the number of small business loans granted decreased by 55 percent between fiscal year-end 2007 and 2009, from 114,759 loans in 2007 to 52,093 in 2009.
“Overall, the Agency is renewing its commitment in FY 2010 to promote the growth, innovation and global competitiveness of the U.S. small business community as it leads the country out of recession and into recovery and prosperity in the 21st century,” said Karen G. Mills, administrator at the SBA.
