Fannie Mae, Freddie Mac and MSPs
I’m upbeat about the managed services market and the IT channel, but I wonder: Will the mortgage crisis at Fannie Mae, Freddie Mac and IndyMac Bankcorp (among others) begin to impact small business IT spending, lending to small businesses, and the IT channel as a whole?
Unfortunately, I think this is a dangerous time in the history of financial media. Many of us (myself included) spend considerable time reading IT media sites and investment gossip sites that feature perspectives and opinions — rather than in-depth investigative reporting.
If you’re ignoring the financial crisis and hope it goes away, check out some of this coverage:
- Fannie, Freddie Fallout: From Taxpayers to Wall Street to Main Street
- National City Plunges Amid Broad Bank Fears
- Fannie, Freddie Are In Trouble: Should We Care?
Now — as concerns about a credit crunch mount — I find myself returning to old media (The New York Times, The Wall Street Journal) and their investigative teams for some clues on how the mortgage crisis will play out. Unfortunately, the coverage is all over the place.
As a small business co-owner myself, I try not to worry too much about stock market swings — up or down. But bigger trends, such as the mortgage crisis, are worth watching closely. If the residential mortgage crisis begins to spill over into the commercial market, small businesses could have a more difficult time borrowing money to fund new ideas.
That’s just a thesis — or a fear — of mine. But I wonder: Are VARs and small businesses starting to worry about a credit crunch?
The NY Times is reporting Monday night that up to 150 banks could collapse during the mortgage crisis. Bad but not as bad as the 1980s/90s Samp;L scandal.
Here’s the NYTimes story summary.
The credit crunch is definitely affecting the SMB market. I have been seeing it since November. The spillover has already been happening. What’s going on is that banks have to set aside $$ against the bad loans (mostly mortgages) they have written, funds known as loan loss provisions (LLP). These LLPs are $$ that banks have on hand but have to basically take out of circulation and they cannot lend on it so then the only way banks can lend as much or more than they did last year is to bring more deposits into their bank, which is a tough task since many businesses have less cash than last year at this time. Things we have seen in the SMB market include:
1) Credit standards tightening (not just banks but my field too)
2) Due diligence tightening tremendously to fight fraud and other desperate or illegal behaviors
3) Sales cycles increasing tremendously even though the SMB has an immediate or near immediate need for new equipment
4) Our sources that fund our deals typically use about 20% bank funds so this is a reason why leasing companies are being affected as well and why we have more restrictions than we used to.
5) Tech equipment has been the most robust market for us as clients in all fields see it as a necessity now as compared to some other equipment types we work with.
6) We are seeing more exotic deals (less in our typical bread and butter range) including refinances of equipment bought outright as a source for working capital.
So I’d say yes there is a credit crunch but more importantly, there is a liquidity crunch. There just isn’t as much cash around to lend to businesses as there used to be and of course enterprise companies and those with excellent, longstanding bank relationships will get precedence for those funds. Companies like mine get to step in and help the rest although some of these things have made my job a little tougher than it used to be.
Stu: Thanks for offering some dollars-and-cents perspectives. Happy to report that MSFT, IBM and GOOG all reported strong quarterly growth today — though MSFT and GOOG will take a hit on Wall Street since growth wasn’t fast enough for investors’ liking.
Still, it’s good to see tech spending moving along — even as we all deal with credit standards tightening.