Subprime Time

If your company enjoys strong credit, on the other hand, the price increase from nontraditional lenders may prompt you to look again at banks. “Banks have comparable rates now and are more flexible in other ways,” Kriesel says, pointing to banks’ ability to offer assumable loans, permit prepayment without penalty, and allow borrowers to use the same   real estate to fund future borrowing. “A lot of customers are saying, ‘I don’t want to deal with a life insurance or conduit company if I can deal with a friendly bank, rather than an unknown face out there in the marketplace,’” Kriesel says. “My ‘in’ box is full of deals I wouldn’t normally be looking at.”

Nontraditional lenders have moved into the market for mortgages and working capital lines; they’ve also been major sources of debt funding for large mergers and acquisitions deals.

In the aftermath of troubles in the subprime mortgage market, however, banks and nontraditional lenders have grown less willing to loan large sums of money to fund business sales and acquisitions. A hedge fund might have once been comfortable with a particular debt-to-value ratio; now those ratios are lower, Brooks says.

As a result, some businesses are forced to revamp deal terms to include lower prices. “They’re getting less money than they expected, so what they’re trying to do has changed,” Brooks says. A lack of debt financing, for example, forced Home Depot to lower the purchase price it accepted when it sold its commercial supply business unit in August 2007. The final price was nearly $2 billion less than in the original agreement.

The problem appears limited to large mergers and acquisitions deals, but could eventually affect smaller ones as well. “It could move downstream, so it bears watching,” Mueller says.

The Wait and See Economy

Businesses might get less or pay more because of changes in the credit market. But businesses also face tougher borrowing terms when the firms themselves have dimmer prospects. “If you sell less or at lower prices, both would affect your profitability, and therefore the risk that a bank might assign to your business,” Huckle says. “You may see higher rates if your business is affected.”

Retailers are particularly vulnerable when consumers close their wallets. “The U.S. economy is driven by consumer spending, and people spend less when they feel that they are less wealthy,” Mueller says. “If my house is going up in value, I feel richer, and I actually am richer if my home is worth more and I can borrow against that. The opposite psychology works if your home is losing value.”

Because it’s so hard to know how the economy will react over time to the troubled subprime mortgage markets, watching and waiting—and leaving some room for financial changes—is probably the best course for most business owners. “You should have an eye on the market,” Mueller says. “If I were a business owner, I would watch, and I would make sure I think about my expansion plans, and when I’m going to need the funding.”

“Communicate with your banker to make sure the liquidity and terms are still there, and to find out if your banker has any plans to change that,” he continues. “The debt markets aren’t as good as they were, and there are signs that economy isn’t as strong as it was. Take that into account when you make your plans, and allow yourself a little bit more room for fluctuation from your plan, so you’re not caught by surprises.”