Lesson 4 of 25 · 7 min
How funding conditions tighten before any term changes
The first thing to move is the answer to a request, and nobody publishes the answers.
Nothing in an agreement has to change for credit to become harder to get. The document is the last thing to move, and by the time it moves the tightening is several months old.
What moves first is a set of internal settings on a queue. How many new facilities are approved. How much of a requested increase is granted. How long a decision takes. How many questions are asked before it is made. How willing anyone is to write an exception. None of these is a term, none of them is disclosed, and together they are most of what the phrase tighter credit means in practice.
One illustrative quarter against the one before it, on the same lending desk:
- New facilities approved: 612, down from 1,148 in the quarter before.
- Median increase granted as a share of the increase requested: 41 percent, down from 82.
- Median time from complete application to decision: 11 business days, up from 3.
- Documented exceptions to the collateral schedule: 37, down from 214.
For an existing borrower none of this registers. Headroom is unchanged, the rate is unchanged, and the statement is identical. What has been removed is an option — the ability to add capacity, to pledge a second account, to have a term relaxed once. That option is what most informal plans quietly rest on. A plan that says the shortfall will be met by pledging the other account is a plan that requires somebody to approve a pledge, and the approval rate is the number that moved.
Terms describe what the lender must do. Conditions describe what the lender is willing to do. Only the first is written down, and only the second changes early.
Key terms
- Credit conditions
- The unwritten settings that decide what a lender agrees to: approval rates, decision times, appetite for exceptions. They move before terms do.
- Approval rate
- The share of requests granted in a period. A direct measure of tightening that borrowers never see and lenders rarely publish.
- Exception
- A departure from the standard schedule granted for one account. Cheap to grant in a calm quarter and the first thing withdrawn in a poor one.
Worked example
What a contingency plan is worth when it is needed
Illustrative figures. A borrower intends to cure any future shortfall by pledging a second account worth $740,000 at a 55 percent advance rate, and the cure window in the agreement is three business days.
- Lending value the plan would add
- $407,000
- Value of the plan at an 86 percent approval rate
- $350,020
- Value of the plan at a 38 percent approval rate
- $154,660
- Reduction
- $195,360
- Median decision time against the cure window
- 11 days against 3
$740,000 x 0.55.
$407,000 x 0.86.
$407,000 x 0.38.
A 55.8 percent fall in the expected value of the plan.
The plan lost more than half its expected value and all of its timeliness, and neither change appeared anywhere a borrower could read it.
Check yourself
A borrower's headroom, rate and collateral schedule are all identical in March and in September. In September the lender's approval rate on new pledges has fallen from 86 percent to 38 and median decision time has gone from 3 days to 11. Has anything about this borrower's position changed?
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Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.