The handwriting is on the wall, banks are toughening their position with commercial loans, especially SBA guaranteed loans.

To date, two banks have been taken over by the FDIC and ten more are on the watch list. Who knows how many more are on the verge of becoming “watched”. Remember in the late 80′s when over three hundred banks were closed by the FDIC with its assets, the loans, liquidated aggressively and with great loss to all.

I am not suggesting that this is happening again, I do not think it will, although we may see more bank take overs, but I am suggesting that this observation, and many other factors we all know about, such as the huge impact the failing mortgage market is having on the credit and banking world,  is telling us something important that we must understand and respond to appropriately.

In a word, it is time to accept the fact that commercial lenders are reviewing their portfolios and are one by one isolating various loans and “cleaning them up”. This means some act of liquidation, either slow or fast but it is not about “working with the borrower” . It is about ending the relationship, taking losses and ridding the bank of the “bad” loan.

Here is what I am seeing.

Loans with interest only payments, are being moved into workout, called and liquidated.

Loans that are in any state of default are being called and liquidated.

Loans that are coming due and are usually extended for additional terms are NOT being extended and are being called and liquidated.

SBA guaranteed loans are being treated very aggressively and are being called for any reason available.(see many other entry’s on this subject in this blog)

Why is this happening?

The pressure is from the declining credit market, the difficult economy we are experiencing and the projections that things will get worse before they get better. Thus the banks are hunkering down and taking smaller losses now rather then experiencing worse losses later. They would much prefer to take the loss then carry a non performing loan.

There is much pressure from the FDIC on banks to remain withing allowable lending standards which limits the amount if non performing loans or questionable credit loans or under capitalized loans or loans in default etc., that a bank is allowed to hold before the FDIC steps in and begins requiring various clean up measures.

This is always very difficult for a bank and causes them much trouble, and can cause a bank to be taken over or even shut down by the FDIC.

In addition aside from the FDIC requiring the banks to set aside capital to support the potential losses from such loans which further reduces the banks ability to lend and earn compounding the issues and worsening their predicament.

The net effect is the toughening of standards and what may appear to be unreasonable demands for payoff and an apparent unwillingness to work with the borrowers, is now the new rule of the day.

This will continue to occur and will get worse as the economy struggles to find its way out of this current liquidity mess.

Unfortunately this leaves the borrower with few alternatives as leaving one bank under such conditions does not open the doors for other banks wanting to pick up these loans. The borrowers may be faced with liquidation if they cannot replace the financing which is more difficult then staying within the same institution.

A word of caution, the offer to move you into the workout department, or the loss mitigation department or to have you work with a recommended outside workout or turnaround specialist are all forms of liquidation and are not to be construed as a helping hand.

The reality is that these offers and programs are designed to squeeze the cash flow out of you paying down their loan and thus leaving you with even less operating capital and even more unlikely to be able to handle the debt service and your business operations requirements.. simultaneously.

What can you do about this?

Do not get caught in this crossfire if you can help it.

If you do get involved understand your predicament and engineer a workout resulting in a reduced payoff so that you may emerge in better condition then you were before. (see many other entry’s regarding this topic written in this blog)