Short-Term Credit Evaporating

With all eyes on Congress and round two of the bailout push today, a new treasury survey underlines the need for a speedy resolution. Companies are starting to have trouble getting the short-term credit they need to cover seasonal shortfalls and temporary payment imbalances.

The Association for Financial Professionals (AFP) polled 4,000 of its members in early to mid-September about the availability of short-term credit -- and then, to gauge the impact of the continuing turmoil in the latter part of the month, the association followed up with a supplementary survey that yielded 326 responses, 270 of which were from corporate practitioner members.

In the earlier poll, just under half of respondents said that, despite the credit crunch, they'd seen no significant change in access to short-term credit over the past two years. But fully 40 percent of the finance executives who responded to the later poll said that their organization now has less access to short-term credit than it had at the beginning of September.

What's more, 62 percent of respondents, and more than two-thirds of those from large enterprises, said that their organization has already taken at least one action as a result of the drying up of short-term credit in September. The most popular move, reported by 41 percent, was transferring all or most short-term investments to bank deposits and U.S. Treasuries. Thirty-seven percent have reduced capital spending, and 26 percent say they've frozen or reduced hiring.

If access to short-term credit hasn't eased by the end of the year, more companies will be adopting such defensive measures. Sixty-one percent of the AFP's sample say they'll cut back capital spending, 42 percent will freeze or reduce hiring, and 26 percent will consider staff reductions or layoffs.

"You don't have to read into those numbers too much to see what the impact will be on Main Street," says Jeff Glenzer, managing director with the Association for Financial Professionals. "This is not some speculative conclusion that if we don't address liquidity issues Main Street might suffer -- these are real organizations who are already undertaking meaningful actions that affect their employees and other companies, and it's only going to get worse if Washington doesn't act."

Companies might want to review their investment policies with a view to countering the current crunch and any similar future crises, according to Dan Carmody, managing director of TreaSolution Inc., a Chicago-based consulting and staffing firm. "I think many people would agree that the lack of liquidity would constitute a disaster," he notes. "A new best practice that may have arisen from the current financial environment is the incorporation of liquidity disaster recovery into an organization's investment and/or debt policies."

The 2008 AFP Short-Term Credit Access Survey is available here.