IT’S a phenomenon that some experts are calling the “perfect storm” — the convergence of events emanating from the US that have thrown world financial markets into turmoil, and with rising inflation, has pushed Australian interest rates to decade highs.
The sub-prime credit crisis has caused huge disruption to overseas banks and those still standing are dramatically reigning in their lending policies.
In the Australian context, even though our banks are fundamentally sound, the reduced amount of funds available on the wholesale market has effectively led to a rationing of lending and translated to increased rates and tightening of credit policies.
The next 12 months will be a critical time for businesses. Businesses need to ensure they have the best possible balance between bank provided working capital and also access to a complete range of finance options to supplement their banking facilities. The main issue will be available credit limits and making sure your bank does not have too much control over your business:
• Most working capital facilities are advanced against the security your bank holds over your business and other assets provided.
• If your bank decides to review the security and assesses it to be worth less than before, or if the bank changes its lending ratios, then your ability to borrow for working capital may be in serious jeopardy. This situation occurred in the market downturn of the early 1990s and specific events over recent weeks have shown that banks are already beginning to review clients credit limits.
• Most banks will have all monies clauses in place for your banking limits which will include a debenture charge over the business assets. This gives the bank control over your business in the event you are not able to comply with their covenants.
So what should businesses be doing?
The principal strategy is to spread your debt over a number of financiers rather than leaving all your financial eggs in one basket.
More than ever businesses need to be proactive in how they source their business finance. Just using one bank is not always the best solution.
* Michael Christie is a broker with Interlease; 03 9429 4299.