Why “Big Banks” Are Turning Down Working Capital Lines of Credit at a Record Pace
17:42 19 November
in Blog
Has your request for a Working Capital loan ever been declined or converted to a term loan restricting your ability to grow? Many construction subcontractors who have expanded bidding opportunities are running into problems finding working capital due to significant restrictions put in place by the Dodd-Frank law.
Below is a response Capstone Corporate Funding, LLC received from a global financial institution on behalf of a client for whom Capstone Corporate Funding, LLC was seeking a Limited Subordination Agreement (LSA) so that we could Factor their Construction Accounts Receivable and accelerate their working capital to pay essential expenses like rent and payroll in a timely manner. All references to names or places have been deleted to protect the privacy of the client and the “big bank”.
“The request has been declined based on the reasons provided below:
The subordination of the receivables mentioned in the attachment will diminish the overall value of our UCC filing as it requires us to take junior position to the Factoring company. This relationship is already considered high risk as the line is currently in process of being termed out due to EW concerns (High Utilization, Insufficient Liquidity, and # of recent inquiries). In addition further concern was noted due to recent review of financials indicating a decline in revenues between 2011 and 2012 with negative taxable income for 2012.”
The subordination of the receivables mentioned in the attachment will diminish the overall value of our UCC filing as it requires us to take junior position to the Factoring company. This relationship is already considered high risk as the line is currently in process of being termed out due to EW concerns (High Utilization, Insufficient Liquidity, and # of recent inquiries). In addition further concern was noted due to recent review of financials indicating a decline in revenues between 2011 and 2012 with negative taxable income for 2012.”
This “big bank” response is typical in today’s banking climate. Dodd-Frank, which created the “too big to fail” banking syndicate, has resulted in small businesses being frozen out of the working capital loan markets because they are deemed to risky. Cyclical businesses are no longer welcome at America’s “big banks”. Dodd-Frank requires banks who continue with these loans to put as much as 30% of the loan value up as cash collateral due to the loan’s risk rating. Revolving credit facilities are being termed out, locking up the flexibility that many business owners need to grow their business and hire more employees. Business owners in need of working capital seem to have limited options for obtaining working capital.
To help small businesses (or business owners) secure working capital in a manner that is compliant with federal law, Capstone Corporate Funding, LLC provides a LSA which only requires the “big bank” to subordinate only on an individual invoice-by-invoice basis. Unlike the quote and typical subordination agreements, Capstone Corporate Funding, LLC does not seek subordination on all of the small business’ assets, only on a single invoice factoring, thereby maintaining the senior lien position for the “big bank” on all of assets of the small business.
Capstone Corporate Funding, LLC has observed that through the use of the LSA, our clients grow rapidly and are able to reduce the term debt owed to their bank ahead of schedule and in many cases in half the time. For more on this topic – check out our article from The Secured Lender Magazine – Debt Hangover Relief