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Over the past 18 months, the commercial finance markets within Australia have undergone dramatic change, resulting in a complete cultural shift within almost all finance institutions. It seems like a lifetime ago – but in reality barely 18 months ago – that mountain ranges of debt were in vogue as the latest Leveraged Buy Out hit the debt finance markets seeking to obtain 5,6 even 7 times multiples on earnings to support the latest private equity sponsored M&A deal. Lenders were falling over each other to lend monies – where credit was being sold in a commoditised game of chicken; where the most aggressive structure and least cost won the day. Roll forward 18 months and now we can see how times have changed.....
Long gone are the days of excess – the cold global winds have eroded mountain ranges of debt to rolling hillocks gently and uneasily protruding from a barren wasteland. The financial erosion has left in its path the battle scars of once gallant fighters running to their governmental saviours – and a culture of fear and caution.
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About the Author: Tim Lea is the co-author of the book "A Guide To Factoring and Invoice Discounting: The New Bankers."
He has spent 20 years within the Cash Flow Finance industry, as both a lender and a broker and is the Managing Partner of Cash Stream Financial, an independent commercial finance broker specilaising in Factoring, Invoice Discounting and Inventory Finance. |
In the Australian market, the major banks are in prime position, with their healthy deposit base giving them the ability to lend – if they choose too. We are hearing of far tighter banking covenants and tighter financial ratios – the return to a credit culture. Their own internal re-structures have further re-inforced this culture – after all if credit officers have seen their colleagues leave as a result of a re-structures what incentive is there for any risk taking beyond the controlling credit matrices. It is easier to say no than risk being the next corporate statistic. So what of the more entrepreneurial second and third tier finance institutions?
Many are not in the luxurious position of having banking deposits as their foundation of lending and have to rely upon the inter bank markets or securitisation of their loan books (i.e. borrowing from other banks against a pool of loan assets to fund that pool). Confidence, however, in any form of inter-bank lending long evaporated with the credit crunch and whilst the global governmental injections of capital has tried to stem the effect, it cannot influence the one key organic beast that will develop by itself - confidence. As Oscar Wilde once said – confidence is like virginity you lose it only once! Banking confidence is very fickle and shallow and has been battered into a pulp. It will take a long time to restore, with this further re-inforced by the economic cycle.
Recession eats away at confidence like a cancer – with the implicit threat of increased bad debts front of mind, especially within finance institutions. As a result, inter bank lending is still at low levels – with the end result that second and third tier lenders, the only bastion against ivory tower credit, still have little capital, if any, to lend – and like anything in scarce supply will allocate it carefully against better credit quality and yield i.e. price. We are seeing this already in the finance marketplace – credit is increasingly tighter and yields are on the up, and now it is more a question of getting approval for finance raising than at what cost.
Credit is now being earned not sold and unfortunately we need to be prepared for this culture to continue at least for most if not all of 2009
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About the author: Tim Lea has specialised in factoring and invoice discounting for the past 20 years and is a published author on the subject of factoring and invoice discounting. He is a partner of Cash Stream Financial (www.cashstream.com.au), who are specialists in raising factoring and inventory finance. You have full permission to reprint this article provided this resource box is kept unchanged
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