Greenwich Associates Reports That US Companies Suppose They're Paying For Banking Industry Errors In Past

Relationships between US companies and their banks are becoming strained as small and mid size businesses feel that they are being made to pay for the banking industry's past mistakes. More than a third of the 670 small and mid

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Relationships between US companies and their banks are becoming strained as small and mid-size businesses feel that they are being made to pay for the banking industry’s past mistakes.

More than a third of the 670 small and mid-sized companies participating in the latest Greenwich Market Pulse say they are paying more in interest rates or banking fees than they were six to 12 months ago. Among small businesses that have been hit with higher rates or fees, 55% feel they are being taken advantage of by their banks and cite increases as “unacceptable” as do 44% of mid-sized companies that have experienced increased banking costs. Looking ahead, three-quarters of small and mid-sized companies surveyed by Greenwich Associates say they are concerned about their ability to secure the financing needed to run their businesses in the coming year.

“Credit-worthy companies believe the banks brought on their own problems, and are unhappy with the fact that they are being asked to pay for bank mismanagement,” says Steve Busby, Greenwich Associates consultant.

The majority of small and mid-size companies do not think they should be subjected to any additional fees in the current market environment and some feel betrayed by banks with which they have had long-standing relationships. However, a sizable minority – 37% of small businesses that have experienced higher banking costs and 43% of mid-sized companies – say they understand the banks’ need to charge more, but only until the situation stabilizes. Many of the companies participating in the study say the increased charges have negatively impacted the sense of partnership they had with their banks, or even turned their relationships into adversarial ones. Many expressed a willingness, and even an eagerness, to switch banks at the first available opportunity if it means lower costs, or a better banking partner.

For now, however, many companies will need to stay put with existing banks due to the lack of credit available elsewhere. The Greenwich Associates Credit Availability Index, which compares on a net basis the number of companies saying credit is becoming harder/easier to obtain, declined to -32 in December 2008 from -14 in July 2008 among small companies. The Credit Availability Index for mid-sized companies dropped to -39 from -5 over the same period. By way of comparison, the Index score for mid-size companies stood at zero in December 2007 and at -5 for small companies.

“Corporate executives gave many examples of banks that they had been doing business with for years putting existing lines of credit on hold, being slow to renew lines or even failing to respond to applications for credit,” says Steve Busby. “Companies that have been able to secure credit tell of changes in credit standards, terms and costs of borrowing. If not reversed, companies say the lack of liquidity may require further cost-cutting, including additional layoffs.”

For the banks, the message contained in these findings is clear. Understanding that many banks are now in survival mode, banks must be cognizant of the relationships they have with long-term clients. Rather than treating all companies the same, banks would be well served by doing everything they can to ensure that credit-worthy companies with long relationships get the credit they need at the lowest possible cost.

“At the very least, banks must honor long-term relationships by being up-front about changes in terms and conditions and keeping the lines of communication open continuously,” says Steve Busby.

D.C.

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