In a nutshell, the implications for SME's will be :

• The cost of borrowing will rise
• Credit criteria will get tighter

Like any market, the credit markets react to the forces of supply and demand. As the implications of the US sub-prime crisis have become more apparent, the credit crunch has begun to take effect and the supply of funds has begun to dry up. Like any scarce resource, resources are allocated. in lending and banking there are two key economic criteria:

Yield (Reward)

Credit worthiness (Risk)

When the market is in turmoil these two economic criteria play havoc with the ability of SME's to secure funds at all, and if they can at rates that are economically viable .

Yield

Unlike the credit markets over the past 5-6 years, we are increasingly seeing RISK being priced into transactions, with risk and reward being the classic balances of lending.


In addition, because there are fewer second and third tier lenders lending at the moment, the traditional back-up that used to soak up the riskier transactions are no longer there. The end result, has been a general “flight to quality”, with the banks seeing more and more enquiries. As a result, they can easily now afford to say NO! because the power is in their hands. Additionally they can and, indeed are, pricing risk into transactions - especially for SME's, because the options available are limited.

Credit worthiness (Risk)

As seen earlier in this section, currently the downside risk for a lender is very high as compared to the rewards on offer.

Long gone are the days of lenders “selling” credit (i.e. selling finance) it is now up to customers to “earn” credit - the power is back with the finance institutions and the credit guys are in control.........and will be for some time to come.

Lending ratios and covenants (i.e. the terms of lending) have become tighter and will continue to do so - with increased debt serviceability likely - i.e. the ability to easily re-pay the principal and interest of any loans.

So expect prices to rise and the answers to credit applications to increasingly be NO!