Credit Issues Impact Manufacturing Sector

January 30, 2008
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Nearly one-third of the small manufacturing businesses participating in the latest Small Business Research Board study will request credit level increases during 2008, according to the results of the poll released last week.

The study of owners and managers of small manufacturing businesses also indicated that while their relationships with lenders are mostly "good" or "excellent," they are being challenged by greater pressure for personal guarantees, higher loan rates and stricter covenants.

Of those responding to the poll, 32.6 percent will request an increase in their lines of credit this year, 53.5 percent said they will maintain their current loan levels through 2008, and 14 percent will seek to reduce their credit needs.

This is a departure from 2007 when 21.1 percent of these respondents held the line on credit changes from the prior year, 14.3 percent decreased their credit needs, and 27.1 percent increased their loan levels.

More than 37 percent of the respondents indicated they do not have loans or a line of credit. During 2007, 42 percent of the participants felt that access to credit was unchanged from the previous 12 months, while 36.8 percent said it was "easier." Of the remaining respondents, 5.3 percent described access to credit as "more difficult," and 15.83 percent indicated that access to credit was "impossible."

The Small Business Lending Relationship and Loan Requirements Study found 88.5 percent of the manufacturing businesses enjoy a "good" to "excellent" relationship with their principal lenders.

The SBRB study also indicated that 81.1 percent of the relationships the businesses have with their current principal lenders have lasted at least five years, with 69.6 percent lasting 10 years or more. According to the report, 1.4 percent of the businesses are in their first year with their current lead lender, while 7.2 percent said their relationship is in the second year. 

Of these same respondents, 67.4 percent said they were with their previous key resource for five years or longer before making a change.

Slightly more than 37 percent said their business has a relationship with one lender, and nearly 26 percent said they have a relationship with two lenders. The remainder have concurrent relationships with three or more lenders. Questions only pertained to the principal lenders.

Additionally, 40 percent of the respondents said their principal lending relationship is with a local bank, 27.1 percent said the relationship is with a regional bank, and an equal 27.1 percent said the relationship is with a national bank.

The study also found that among owners and managers of small manufacturing businesses:

  • Of those using their residence as collateral, one-half of the lenders are adjusting the borrowing levels. In those instances, 78.9 percent increased the credit ceilings and 21.1 percent decreased the credit amount.

  • 21.9 percent of those responding contend more pressure for personal guarantees are having the most significant impact on their business. Higher loan rates (19.2 percent) and stricter covenants (17.8 percent) followed as the second and third most significant factors.

This is the sixth in a series of 11 SBRB studies examining small business lending relationships and loan needs. Key findings in the previous reports studied the trends of all small businesses throughout the U.S. and indicated that:

  • 26.8 percent of all respondents will raise their loan requests in 2008, for an increase of 3.5 points from 23.3 percent in 2007.

  • Of those business owners using their homes as collateral, 42.4 percent said their lenders had amended their borrowing levels, with two-thirds of the respondents receiving higher credit ceilings and the balance receiving lower credit limits.

  • Higher loan rates and increasing pressure to provide personal guarantees are the two greatest factors impacting the relationship of small businesses with lenders.

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