Credit for the middle market Featured

8:00pm EDT September 25, 2008

Many people assume that banks stop lending in a less favorable economic environment, but this oversimplifies a complex issue. Banks with moderate risk portfolios continue to provide businesses with access to credit and, in doing so, can promote economic growth in turbulent times. While it is true that there is an increased level of scrutiny during the loan approval process and that the pricing and structure of loans is more disciplined, many companies can still obtain the credit they need to grow.

Smart Business spoke with Michael Harrington of PNC’s risk management group to gain some insight into what banks may be looking for during the credit decisioning process and how middle-market companies can better position themselves to seek credit.

What is different about the credit decisioning process in tough economic times?

For most banks serving the middle market, the fundamentals of lending do not vary significantly with economic fluctuations. They look at a variety of traditional criteria like cash flow, liquidity, leverage, collateral and the unique challenges that customers face within their industries. Another critical factor in an analysis is the experience and integrity of a company’s management team. Companies that are well managed tend to make strategic and tactical decisions for long-term success. The bottom line is that credit is still available for middle-market companies that have historically performed well.

Are there certain industries for which it is difficult to obtain credit in an uncertain economy?

Although there are strong performers in every industry, banks may be more cautious about lending to companies in industries exposed to the housing sector, financial services and anything impacted by consumer discretionary spending, such as the automotive and retail industries. It is still possible for companies in these industries to obtain credit, but the due diligence process will likely be more judicious. Banks will be particularly cautious with any company carrying excessive amounts of leverage.

In general, businesses should adjust their expectations about loan pricing and structure in an uncertain economic environment as loan terms will likely be tighter with higher all-in borrowing costs. Historically, tight credit markets have eventually improved and companies can then return to a more favorable lending environment.

What are some of the ways middle-market companies can prepare if they are planning to seek credit?

  • Keep the lines of communication open: Be open and honest with your bank so that it has an accurate understanding of your company’s financial performance. Share your industry expertise to give your bank the kind of in-depth understanding that will compel it to help you navigate uncertain times proactively rather than forcing it to react to an unexpected event.

  • Leverage the expertise of your bank: Middle-market companies often do not leverage the deep industry, financial and risk management expertise that a bank can provide. Think about your banker as an adviser rather than a commodity provider and don’t hesitate to share all facets of your business.

  • Surround yourself with advisers who will help you achieve your objectives: Choose your advisers — banker, lawyer, accountant or board member — based on their proven experience in the market. Professionals with a reputation for bringing clients new ideas and challenging conventional thinking will be an asset, particularly during an economic downturn.

This article was prepared for general information purposes only and is not intended as legal, tax, accounting or financial advice, or recommendations to buy or sell currencies or to engage in any specific transactions, and does not purport to be comprehensive. Under no circumstances should any information contained herein be used or considered as an offer or a solicitation of an offer to participate in any particular transaction or strategy. Any reliance upon this information is solely and exclusively at your own risk. Please consult your own counsel, accountant or other adviser regarding your specific situation. Any views expressed herein are subject to change without notice due to market conditions and other factors.

©2008 The PNC Financial Services Group Inc. All rights reserved.

MICHAEL HARRINGTON is an executive vice president in PNC’s risk management group, part of The PNC Financial Services Group Inc. Reach him at (412) 762-2019 or To learn more about obtaining financing for your business, check out PNC's Advisory Series at