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Published Articles by David Balovich

Title: Credit Granting 2009
Published in: Creditworthy News
Date: 11/20/08

The election is now behind us but, unfortunately, a new President and Congress won’t put an end to the recessionary issues affecting this country.

The recently issued Federal Reserve report states that “lending is tight and probably will get tighter”. Eighty-five (85%) percent of domestic banks – up substantially from sixty (60%) percent in July – reported tougher lending standards for large and mid-size business loans. During the same period seventy-five (75%) percent of banks reported tightening their lending standards for small businesses.

As for credit cards, don’t anticipate the same amount of activity as in previous months or years. Nearly sixty (60%) percent of banks responding to a Fed survey said they had strengthened their standards for existing credit card accounts. The same number of respondents also reported cutbacks on credit card accounts granted to card holders who failed to meet their credit-score thresholds.

One would expect banks to be lowering or declining credit to nonprime borrowers or those at risk of not paying their bills as sixty (60%) percent of banks reported. But twenty (20%) percent of all domestic banks reported reduced credit limits on existing credit card accounts to prime borrowers, those who either pay the minimum payment amount on time or retire the entire credit card balance each month.

Ninety-five (95%) percent of banks that had implemented reduced limits citied “a less favorable or more uncertain economic outlook and reduced tolerance for risk”,  as reasons for the reductions according to the Federal Reserve.

The Federal Reserve also reported fifty (50%) percent of all banks reporting to have increased minimum required credit scores on credit card accounts during the previous three months and plans to continue monitoring those minimums during 2009.

The same number of reporting banks indicated they had become either “somewhat or much less willing” over the past three months to make installment loans, up from thirty-five (35%) percent in the July report and the largest percentage in more than two decades.

For the last two decades trade creditors have bemoaned the fact that customers were using their open credit facilities more like a bank loan then a thirty (30) day term. Trade creditors along with their customers citing “industry standards” have permitted their terms of sale to be treated as installment credit causing customers to owe in excess of not only established credit lines/limits but also their capacity and capital. Now, with the bank and financial industry unwilling to make capital available not only to the subprime but also the prime borrower, the trade creditors are now being asked to assume increased risk in a time of unprecedented bankruptcy filings and business failures.

The most often asked question has always been, “What can we do to minimize risk?”

However, in today’s economy it is being asked seriously because if the answer is not paid proper attention than the prospect of the trade creditor becoming one of those business failures is a very realistic

We are advising our clients to take the following steps.

(1)   Make sure that your active accounts are up-to-date and contain the most current information. Review existing credit lines and identify those accounts whose balances currently exceed the assigned credit limit.

(2)   Obtain a current copy of your states’ Commerce & Business Code. You and your staff should be completely familiar with Article 2 (sales contracts), Article 3 (negotiable instruments), Article 4 (bank deposits & collections) and Article 9 (secured transactions), of the Uniform Commercial Code. This information will inform you of yours and the debtor’s rights. Also, obtain copies of your states anti-trust laws and review the federal anti-trust law, Robinson-Patman Act.

(3)   Review your present credit policy and procedures and make certain everyone affected is aware of the current policy.

Finally, understand that decisions concerning credit policy, extension of credit and credit lines/limits, during these uncertain times, should not fall to one department or individual. During these times these decisions should be business not credit decisions. We strongly urge credit professionals to form committees comprised of credit personnel, sales personnel and senior management to review company credit policy, key customers, marginal customers, and general business and industry concerns in determining the company’s terms and enforcement of terms to ensure the success of your organization.

Remember asking for assistance is a sign of strength not one of weakness.

I wish you well

The information provided above is for educational purposes only and not provided as legal advice. Legal advice should be obtained from a licensed attorney in good standing with the Bar Association and preferably Board Certified in either Creditor Rights or Bankruptcy.  

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