Banks in a bind
Sunday, May 17, 2009/
Boss Lady – while I agree with your underlying sentiments about the position of the banks, unfortunately I feel an element of pragmatism needs to be brought to the table. Banks are not charities. They have to make money to survive and but most importantly in recessionary times (now) it is about NOT LOOSING money. Their gross margins are very thin – besides various fees which enhance their returns, for a $1 million loan they might make 4% gross margin (after cost of funds). However if they LOSE $1 million they have to loan out $25 million of additional loans to get it back (4% of $25 million). With the credit crunch cash in the inter-bank markets is still hard to find – so lenders do not want to have to raise additional cash – we are hearing rumours of a number of the lenders we deal with having trouble securitising their loan books.
Banks do not have access to unlimited cash – so they want to minimise risk (that is, loss) and reduce their reliance upon external funds. By getting all loans and cash receipts from customers this ensures they have control (can minimise risk) – it also means they can monitor the flows of cash in and out of the business – by doing so they can monitor their risk. It equally has the bonus of giving them cash deposits. But Businesses have the choice to say NO! – ie not giving everything to the banks and look at alternative sources of finance – e.g. factoring, inventory finance – that generally DON’T require real estate.
We cannot expect the Government to force the banks to change behaviour in relation to SME business finance – it interferes with the “market” and would potentially de-stabilise the KEY element we need to overturn this whole crisis – CONFIDENCE.
Recessions are hard to trade in and cash does get tight – but recession is a time for “cleansing” – it is a time for battening down the hatches. While cashflow problems are regrettable they are only caused by the weak fundamentals of a business – the potential lack of viability. Recessions mean we all have to take responsibility – and take tough decisions to make our businesses increasingly viable. We cannot expect the banks or any other third party (government) to take responsibility for our own actions. In our current experience of financiers in general their positions will only get tighter……and we have to live with that and work around it and we will all be stronger for it when the good times return………and a final cliché – the similarity between a boom and a bust is that when you are in them you think they are never going to end…..but they will.