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A serious problem continues to develop, whereby small manufacturing, distribution and service companies are being advised by their commercial bankers that their credit lines are being curtailed, reduced or in some cases cancelled. You may even be in the process of finding a new banker.

Over the past 12 months, we are witnessing a number of U.S. banks struggling to stay afloat. The largest of them are typically rescued by the FED. Their demise is considered to risky for the health of financial system… we don’t entirely agree.

On the other hand, when a Commercial or Community bank experiences financial hiccups, the Fed approaches the situation from a different perspective, because they don’t believe that their failure would cause any serious financial havoc.

Your business has seen good times and rough times. Due to current economic conditions, you may have experienced a downturn in revenues. Your banker has always stood with you in the past… so what’s different now? What’s making him nervous about his credit exposure? Could your bank be having problems that have nothing to do with your business?

Let me explain… when a bank’s liquidity level falls below FED guidelines, (7%) they are instructed to raise additional capital in order to shore up their balance sheet. If they don’t, the FED will step in and take control. Either someone can write a check to add liquidity, or the bank can start reducing their exposure by reducing their customer’s credit facilities and outstanding loans. In short, money gets tight. If the bank is successful, they will have dodged a bullet. In the process, your business may get squeezed, affecting your ongoing operations.

Additionally, if you are not able to secure new credit lines with a different banker, you will need to consider alternative financing… Asset Based Lending (ABL). The rates are a few points higher, but you will have the liquidity to continue operating and growing your business.

See your bank’s current financial condition at http://www3.ambest.com/banks/ and follow these simple steps:

1. Insert your banks name in the search window and click find

2. Click on their bank’s name

3. Click on your bank’s ‘Statement Report’ and their ‘Ratio Report’… always interesting.

Please understand that 2009 is going to be a difficult year for small businesses. Be sure that your relationship with your bank is sound… and more importantly, that your bank is in strong financial condition. Remember… ‘Be in control of your capital’.

To learn more about Asset Based Lending, please see www.EssexCP.com. or go to http://en.wikipedia.org/wiki/Asset_Based_Lending. You can also give us a courtesy call with any questions you may have.

Allen C. Jones, Ph.D.

Managing Partner
Essex Capital Partners, LLC
www.EssexCP.com