Lending criteria tightening in exposed industries

Evidence is mounting that banks are tightening the flow of finance to business lenders as they attempt to offset increased costs stemming from the credit squeeze.

And businesses reliant on discretionary retail spending, such as big consumer goods, entertainment and even pharmacy, are likely to be the first to see the flow of finance dry up.

A SmartCompany poll of 100 small and medium businesses conducted in February reveals that 28% are already finding it harder to get credit from their bank and other lenders, with 31% reporting plans to downsize growth or halt expansion as a consequence.

Several business finance brokers have confirmed that they are seeing a tightening in the lending criteria banks apply to prospective or current business owners seeking finance.

Joe Sirianni, executive director of finance broker Smartline, says the amount of money banks make available for loan has diminished since the international credit crunch hit in earnest late last year.

“There is less money to go round, so banks are being more selective where they put the cash. I’ve already heard a couple of stories that people can’t get funding because of it,” Sirianni says.

Businesses with an exposure to the discretionary retail sector are already feeling the squeeze. Frank Sirianni, the director of pharmacy industry finance broker and adviser Medici, says one bank has already cut back loan-to-valuation ratios by 15% for the pharmacy sector, and reduced the amount available for borrowing by 40%.

“The squeeze will affect all sectors eventually, but there is pessimism about retailing and that is a factor. Even though pharmacy is protected from a drop-off in discretionary spending to some extent, people do make choices about how much they will spend even when it comes to drugs,” Frank Sirianni says.

The prospect of cuts to Government subsidies for drugs, as it attempts to rein in spending and increased competition from shopping centres, are also factors that could feed into bank’s perception of the risk profile of the pharmacy sector.

Allied Capital commercial finance broker Rob Stevens is another who says he has seen banks tighten up their scrutiny of business loan candidates.

On his analysis, in the current environment banks are likely to become more risk averse in relation to businesses that rely on luxury goods or discretionary spending – for example, video stores – than those tied to basic consumables or food – for example, Subway franchises.

“Assumptions about levels of gearing are questioned a bit more finely. They will still lend, but they are being a bit more careful, especially in relation to start-up funding. So things like experience of directors and track record are becoming more crucial,” Stevens says.