Is the credit-dependent business model unwinding?

On Mish’s weblog, Farmer Don comments:

Had a talk with my main lentil processor/exporter today. If what he says is true, this bank tightening of credit is really throwing a wrench in the specialty crop trade. This fellow has been buying, cleaning and exporting lentils in our area for a good twenty years. Before the banking/stockmarket/commodity crash, he said he dealt with about 60 buyers world wide.

These buyers had to have a letter of credit from their bank to do business, as it was all done on credit. He also only deals with buyers that the Canadian Economic Development Corp would issue insurance on. So the routine was to call up the CEDC and in three hours they would tell him if he could buy insurance on each shipment to these buyers. 

To come to the end of the story. ONLY SIX OF HIS SIXTY buyers can now get credit, and be insured. He says most buyers just can not access money. This is in a business where there still is demand, where real stuff is being traded. 

He says he sees no quick end to the problem. Looks like cash is king and those with cash will do well since 90% of their competitors are no longer doing business.

The mystery of the moment is whether cash is king temporarily, until the credit crunch eases and the status quo returns, or whether the trust on which the credit-dependent model rests has in fact evaporated, never to return.

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One thought on “Is the credit-dependent business model unwinding?

  1. I have been following the press closely in regards to the credit crunch. I believe your observation is right on, that is, banks are simply unwilling to lend right now. I talked to Wells Fargo who told me that once you give them cash collateral they would be willing to extend a letter of credit.

    All the experience and know hos of solid financing via collateralization of assets has been forgotten.

    In case you have any questions regarding letters of credit, please visit the Letter of Credit Forum which hosts several articles on international trade finance, sample documents, and a blog. Of course you can ask questions in the forum which is frequented by many experts in international trade.

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