Risk Rap

Rapping About a World at Risk

A Borrower and Lender Be: SME Lending

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Bankers are catching some major heat. Senators are screaming at the money lenders in an effort to have them explain what the banks did with the $350bn they gave them in the first round of TARP funding. Now that the second $350bn tranche of TARP funds is about to be dispersed, the politicians want assurances that a good portion of the money will find its way into the economy in loans to small & mid-sized enterprises (SME). All believe that this is critical to halt the specter of the deepening recession.

If it wasn’t so serious it would be funny. Banks are getting yelled at by the politicians for not lending. Angry constituents are beating up the politicians for giving the banks the bailout money in the the first place. They complain that the Treasury Department is giving banks taxpayer funds at a 1% interest rate that banks in turn lend back to taxpayers at interests rates that are considerably higher. To close this circle of pain, consumers are getting nasty calls from their bankers and debt collection agencies, threatening them with punitive actions if they don’t pay their mortgages and outstanding credit card balances. Everyone is a debtor in this comedic cycle of pain.

Now that banks are flush with cash from the second round of TARP funding they must start lending and SMEs need to start borrowing. Its that simple. What is not simple is breaking the stalemate of confidence that exists between lenders and borrowers. Risk aversion is extremely high. Banks are very concerned about adding credit risk exposures to commercial loan portfolios. A recession creates enormous market challenges for SMEs. Bankers need to develop an enhanced sense of confidence in the management and business prospects of an SME before it will extend credit.

Both lenders and borrowers can come together in a shared understanding if they are willing to engage in the deeper work that is required by the new business realities. SME managers must be aware of the business and risk management practices that bankers generally look for when assessing credit worthiness. SMEs must be able to demonstrate to lenders that they are committed to sound risk management and corporate governance practices. SMEs must also be prepared to meet transparency requirements of banks with honest and timely disclosures.

Bankers actively seek SMEs that are run by focused and capable managers. SMEs that can demonstrate effective risk management skills and an awareness of the challenges and opportunities present in their market will find that bankers are more then willing to extend new credit facilities to them. Bankers will have greater confidence in these SMEs if they understand and believe in the SME business model. Bankers lend with confidence when they understand how businesses can generate sufficient cash flow and profits to pay back loans. Bankers need confidence that credit risk is being mitigated. SMEs enhance banker confidence that they are a good credit risk by demonstrating a strong risk management and corporate governance culture.

Fortunately there is tool that bankers and SMEs use to build mutual understanding and trust. The Profit|Optimizer helps to generate the confidence needed to help banks lend capital and SME to effectively deploy it.

Get the Profit|Optimizer and confidently be a lender, be a borrower and break the cycle of pain to get our economy going again.

You Tube Video: Liza Minnelli, Joel Grey Cabaret, Money

Risk: credit, market, small business

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February 18, 2009 - Posted by | banking, credit crisis, recession, SME | , , , , , , , , , , , ,

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