Despite the decision by Bernake’s desire to “normalize” the financial system by raising the discount rate last week, it’s clear that the credit crunch is not over — not by a long shot. Remember, the discount rate is the interest charged to large banks for direct, short-term loans from the Fed. But since banks are not lending right now; the move in the discount rate is simply not that significant.
In fact, discount window borrowing by large banks has plunged nearly 80% over the past year alone, to just $14.1 billion in loans outstanding as of February 17, down from $65.1 billion a year ago! In other words, since bank lending continues to drop at an alarming rate, banks simply don’t need to borrow from the Fed at low rates. In the last two weeks alone, U.S. bank lending contracted by nearly $40 billion. That brings the year-to-date decline to $115 billion, a record -14% annualized rate.
Since the credit crunch began $740 billion of total bank credit has disappeared from the financial system from a combination of loan loss charge offs, write-downs, and decreased demand for credit. If anything, the credit contraction is actually accelerating and unfortunately for business-owners growing more widespread with:
1. Consumer loans down 12% year over year
2. Credit card balances decreasing at a 28% yearly rate
3. Commercial and industrial loans falling at a 19.3% rate
What does this mean for us in the merchant cash advance industry? Increasing demand for the product obviously (and increase in all other alternative financing such as equipment leasing, traditional factoring, etc.) It also means that a new a whole new class of clientele will be seeking out an MCA. We are rapidly seeing clients with high-credit scores and well established business inquiring for funding. In the past, these clients would have secured a credit line or signature loan in a matter of days from their bank. The key of MCA companies and those selling the MCA will be to service this new clientele. They expect a higher level of customer service and integrity. For those that are willing to expend the time and energy to deliver the service, the rewards will be great.
