For months, JPMorgan Chase has been one of the most difficult banks for small businesses seeking capital. My company, Biz2Credit, recently conducted an analysis of small business loan rejections. More often than not, JPMorgan Chase ranked #1 or #2 as the lender that most often denied requests for small business funding. At a time when big banks reject almost 9 of 10 funding requests, the banking behemoth was a leading naysayer.

Meanwhile, JP Morgan Chase took small business account deposits and bet big on risky investment products that led to huge losses. Embattled CEO, Jamie Dimon, says that “it could get worse” because of the company’s “errors, sloppiness, and bad judgment.”

I’ve experienced first hand the hypocrisy of how Chase treats small business owners. My company’s business credit card had an unlimited line of credit. Without cause, they capped it at $10,000 even though my personal and business credit rating is quite high.

Biz2Credit’s credit marketplace attracts up to 6,000 loan applications each month from small business owners, many of whom were rejected for loans and business lines of credit by Chase even though they had existing banking relationships with the firm.

Led by Dimon, JPMorgan Chase had built a stellar reputation for being great risk managers, but now the curtain has been drawn back, and the Wizard of Wall Street isn’t looking so great and powerful now. His firm took oversized bets with other people’s hard earned money and lost big time. Yet Chase frequently rejected small business funding and cut lines of credit because they were deemed “too risky.”

Does Chase really expect us to believe that derivatives and credit default swaps were considered a safer bet than American entrepreneurialism?

In its pursuit of continued big profits, Chase went to extremes to try to guard against risk. Anyone who understands how the markets work knows that this is not feasible over the long haul. You don’t take record profits without taking big risks and saying otherwise plays us all for fools.

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Recently, Koch, one of America’s best known entrepreneurs, announced Samuel Adams Brewing the American Dream, a program whose mission is to partner with low and moderate income entrepreneurs in the food and beverage industry and provide the tools they need to help them grow and succeed. In creating this program, Boston Beer formed a partnership with ACCION USA, the country’s leading not-for-profit micro-lending organization.

Boston Beer has invested a $250,000 commitment to establish the Samuel Adams Brewing the American Dream Micro-Loan Fund with ACCION, which provides capital and other types of assistance to lower and moderate income micro-entrepreneurs whose businesses might not otherwise be approved for a bank loan.

Koch also is supporting small businesses by developing a series of business education and financial literacy seminars designed to meet the educational needs of food and beverage entrepreneurs and offering advice and expertise of Samuel Adams employees through regular events geared towards micro-entrepreneurs.  Koch explains:

“When I started Samuel Adams back in 1984, the odds were stacked against me, and so as the company grew and became more successful we naturally identified with other ‘little guys’ who benefited from a leg up to help achieve their dreams.  Over the years we’ve found ways to help aspiring home brewers, microbreweries, screenwriters, fiction writers, and sportscasters. With our partnership with ACCION USA we are now able to focus on small business owners in our own industry and give them the support they need to thrive.”

America benefits when successful business owners created or sponsored many programs that help others achieve their dreams. Small business owners — particularly those in the food and beverage industry like Shaun Clancy at Foley’s NY Pub & Restaurant and Barry O’Donovan, owner of Kilkenny House in Cranford, NJ — know what being a successful small business owner is all about. They understand what it is work hard, count their pennies, and provide a product/service that customers want and will keep coming back to get.

Government officials aren’t able to do that. Entrepreneurs can. I applaud people like Jim Koch for mentoring others and showing them the way.

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Brewing the American Dream

The survey found that more than half of small businesses (53%) say they are not taking advantage of the Patient Protection and Affordable Care Act (“Obamacare”) healthcare tax credit, which became available in 2010 for small businesses with fewer than 25 full-time employees. In fact, education may be needed in the business community as one in three small business owners say that don’t understand the law and its requirements.

Other findings:

• What Healthcare Law? Nearly one in four small business owners say they aren’t sure how the Patient Protection and Affordable Care Act has or will affect their company. Half say it hasn’t impacted them and 14 percent say it has had a negative impact.
• Who’s Hiring? Almost half of small businesses (45 percent) do not plan to hire more people this year than they did last year, but one-third say it’s too early to tell.
• Not Quite an Economic Recovery: Close to half of small businesses (42 percent) feel the economy is not in recovery, while 21 percent say they aren’t sure.
• Complicated Finances: More than four in 10 small business owners say taxes are more complicated for their company this year compared to previous years. Almost one-third (31%) report that they owed more in taxes this year than last year.

Also, according to the Manta research, new business activity fell 30 percent in the first three months of 2012, compared to the same time last year.

However, entrepreneurship still continues, and many small business owners aren’t letting factors they can’t control – like high gas prices or the unstable economy – stand in the way of building their business in new ways.

The Biz2Credit platform received a record number of registrations from small business owners looking for startup funding, working capital, equipment loans and lines of credit. The most recent Small Business Lending Index found that lending slowed only at big banks in March (and that downtick occurred after months of steady increases.)

Small business continues to be a main growth engine in the economy. While the climate is not perfect, it is certainly spring-like.

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Hiring Issues and Healthcare Put Damper on Small Business Growth

According to the Biz2Credit Small Business Lending Index, small bank lending remained flat at a 47.6% approval rate, alternate lenders picked up slightly (0.5%) to a 63% approval rate, and loans made by credit unions barely increased (up 0.1%) to a 57.9% approval rate.

Big banks are always the most cautious, particularly when economic news is less than rosy. The March jobs report found that only 120,000 new jobs were created, significantly short of estimates of 300,000+ positions created. Meanwhile, the rising price of oil also makes borrowers and lenders wary.

So while the availability of small business capital has improved over the past 12 months than in 2009 or 2010, the flow of capital may be slowing, which is a cause of concern.

Big banks are still stringent in their loan parameters and approve loans at a lower rate than any other category of lender, despite promoting their efforts in the small business lending space.

This is disappointing news because for the past year lenders of all types had been steadily increasing the number of funding requests from small business owners that they granted. I am a bit concerned that the momentum in the last few months seems to have slowed, and business sentiment is turning cautious.

However, I am still cautiously optimistic that this is a temporary blip and not a start of a slowdown like what happened during second quarter last year when lending stalled after a good first quarter.  The good news is that credit unions and alternative lenders continue to approve more than 50% of loan requests, and small bank lending remains strong.

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March Drop in Loan Approval Rates at Big Banks Is a Cause for Concern

Signed into law by President Obama two years ago, The Patient Protection and Affordable Care Act — commonly referred to as “Obamacare,” is designed to reform the American healthcare system. The law requires individuals not covered by employers or government-sponsored insurance plans to purchase health insurance or pay a penalty. This is what is called the “individual mandate.” The act also increases insurance coverage of pre-existing conditions and expands access to insurance to 30 million uninsured citizens.

At the heart of the debate is the requirement that Americans carry health insurance or pay a penalty. Opponents claim that requiring citizens to pay for health insurance is unconstitutional.

The National Federation of Independent Business (NFIB) is arguing against the “individual mandate” of the Affordable Care Act. According to an article by Emily Maltby and Angus Loten of The Wall Street Journal, the:

“NFIB, a conservative-leaning small-business lobby based in Washington, D.C., spent more than $1.2 million total on the lawsuit in 2010 alone.”

Many small business owners claim that if they are required to pay for their employees’ healthcare costs they would not have sufficient cash flow for operating costs and would be forced to close their doors. The last thing that the American economy needs, at a time when the recovery from the Great Recession is still so fragile, is a law that increases the cost structure of small companies.

The Supreme Court could strike down the individual mandate. However, in doing so, two important and politically popular sections of it would suffer: the rule that prevents insurers from declining coverage or charging higher rates due to pre-existing medical conditions.

I agree that something must be done about the healthcare system. As many physicians tell us, they are squeezed on both side of the accounting ledger. Operating costs — including ever-rising malpractice insurances rates — keep rising. Additionally, those who are still paying off medical school loans have an added financial burden.

Further, the government has mandated that health care providers transition from paper patient records to electronic medical records by 2014. While there are many benefits to having digital records, it is time-consuming and costly. Converting to digitized patient records can run in the tens of thousands of dollars, depending on the size of the medical practice.

Meanwhile, numerous insurance companies no longer pay in 30, 60 or 90 days, they take 120 or more to settle claims. Medicare pays sooner, but the reimbursement rates are capped. If, for example, a visit or a procedure is capped at $70, it is not fair to doctors in places like New York, New Jersey, Philadelphia, LA or Boston, where overall operating costs are so much higher than in less densely populated areas. What’s worse is that private insurers tend to mirror Medicare rates.

Clearly something has to be done to prevent physicians from going broke while enabling small businesses to thrive.

It is no secret my support for small business owners and my belief that entrepreneurship is indeed the way to grow the economy. Placing the healthcare cost burden on small businesses will suppress the number of jobs that they are able to create.

We need to bring tort reforms to control the cost of malpractice insurance premiums for doctors, as well as cap the healthcare premium increase which small businesses have to pay on a yearly basis.

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The most attractive thing about this proposal is that it would help to create jobs without spending any taxpayer money.

“There continues to be a phenomenon in this country where small businesses are starving for credit, yet the federal government is still standing in the way,” Senator Udall said. “I’m talking about the smallest of small local businesses. These are the men and women who need $50,000, $100,000, or maybe even $200,000 to move from their garage to a retail store front, to renovate their sales floor or to upgrade their equipment and expand.”

Credit unions are filling the void when the borrowers are deemed too small to be worth the banks’ time or just don’t fit the lending guidelines of the banks’ corporate headquarters.

“Small-business owners know credit unions in their community that have money to lend, and truly want to help. They probably see each other at little league games, church or play cards together,” Senator Udall said.

The Jump-Start Our Business Start-Ups Act, or JOBS Act, that the House passed last week seeks to increase the availability of credit to start-up companies by expediting and easing the process of making an initial public offering. The problem is that the JOBS Act is aimed at companies with revenue under one billion dollars. There is a big difference between a multi-million dollar company and a local business that needs $50,000 in working capital.

Federal law limits the amount of small business loans a credit union can extend to 12% of their assets. Nearly 350 credit unions are facing their cap, and 500 of them have had to slow or stop their small business loan-making altogether. Senator Udall seeks to change this and hopes to raise the credit union business lending cap from 12.25 percent to 25 percent of total assets

One thing is for certain, over the past year credit unions have been increasingly active in funding entrepreneurs pursuing their dreams of business ownership. My company’s monthly Biz2Credit Small Business Lending Index has reported a steady rise in small business loan approval rates since the beginning of 2011 and into this year.

Approval rates of small business financing requests in February 2012 by credit unions were up 0.2% to 57.8%. A year ago, less than half of small business loans (49.1%) were granted.

A few days ago, I addressed the National Association of Federal Credit Union’s “Strategic Growth Conference” in Scottsdale, Arizona, and encouraged attendees to continue their activity in the small business lending space. Innovation and entrepreneurship have always helped to lead the country out of recessionary periods. I believe that increased entrepreneurship is what has helped turn around “The Great Recession.”

Raising the credit union member business lending cap would help take small business lending by credit unions to a higher level and aid our nation’s economic recovery. The legislation that Senator Udall proposes is an effort that both parties should support.

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Big deficits lead to higher taxes, which are a drain on enterprise, particularly small business. However, many small business owners pay taxes on their profits at the individual level. An annual income of $250,000 may initially seem like a lot of money, but in places like the New York, Boston and San Francisco metropolitan areas, it doesn’t necessarily qualify you as “rich.”

The good news for smaller companies is that President Obama has proposed a 3 percent increase in the Small Business Administration (SBA) budget, raising it to $949 million. The bulk of the money will go toward subsidizing government-guaranteed loans to small businesses. Without a greater government subsidy, the SBA would have to increase fees on borrowers and lenders, a move that could stymie the fragile economy.

Although the president is suggesting a $16 billion cap on the size of the SBA’s flagship 7(a) loan program — lower than the current $17.5 billion cap — the agency would received an additional $7 million for an entrepreneurship training program for veterans. However, the SBA would have to reduce funding for its other counseling programs, including its nationwide network of Small Business Development Centers. These centers have proven valuable to the growth of small businesses. I believe this cut is a mistake.

The President has also proposed a $8 billion Community College to Career Fund that could bolster entrepreneurship. This collaborative effort between the Department of Labor and the Department of Education would train more workers for jobs in growing industries and offer a six-week online course to help create up to 500,000 new entrepreneurs, as well as a six-month entrepreneurship training program available to 100,000 small-business owners. New government programs usually come with bureaucracy. It remains to be seen whether this initiative will make a difference.

Additionally, the budget offers a 2013 tax credit that gives small businesses adding jobs and wages a tax cut equal to 10 percent of wages added up to $500,000. The tax credit would be available only to employers with fewer than 50 full-time workers.

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Whitney reeled off a record seven consecutive number one singles, won six Grammy Awards, sold tens of millions of CDs, and inspired a generation of singers. Her version of “The Star Spangled Banner” sung before the 1991 Super Bowl will forever be the standard by which others are judged. Later, Whitney branched out into films and found success on the silver screen.

Her life became a case of perhaps achieving too much, too soon, and offers important lessons for young people pursuing a career in entertainment or any other industry, for that matter.

There are plenty of things that small business owners can learn from Whitney Houston’s life:

• There is danger in accomplishing too much too soon. Sadly, Whitney Houston became accustomed to the celebrity lifestyle that often includes drug use. Having too much money at too young an age can be dangerous. The lesson for small business owners is that while your startup may be booming, don’t let early success cloud your judgment. Your company may be flush with cash — from a VC, startup loan, your own savings, or your revenues — but don’t spend it extravagantly or foolishly.

• Invest in your talent. Years of drug and alcohol abuse damaged Whitney Houston’s golden voice. She squandered the great talent she had been given. Small business owners should take heed. If you have talented individuals working for your company, nurture them, invest in them. Keep that talent as long as you can. It will benefit you business — and your employee personally — in the long term.

• Branching into related fields can reap tremendous rewards. Once she had conquered the pop charts, Whitney Houston made a successful transition into films, notably with The Bodyguard, a 1992 film that grossed $121 million at the box office. The starring role wasn’t that much of a stretch from her core strength; Whitney played a strong willed music superstar. Entrepreneurs should look for opportunities to expand into related businesses, but remember not to divert too far from their core competencies.

• Know your strengths and weaknesses. Certainly, Whitney Houston was aware of her great talents, but she also realized that she made poor judgments. While recent interviews indicated that the singer understood that her demons hurt her, she simply couldn’t overcome them. Small business owners need to self-assess. Always understand and nurture the qualities that make your company successful. Equally important is the ability to recognize your weaknesses and devote your energy to overcoming them.

• Your personal life matters. Whitney Houston’s stormy relationship with husband Bobby Brown took its toll on her life and career. Small business owners must assess their own work-life balance, refrain from overextending themselves at the expense of their relationships, and avoid relying on bad habits when things don’t go well.

Entrepreneurs who start successful small businesses watch them grow and flourish. If a company is strong enough, it may outlast its founder. Often these enterprises become successful big corporations. Hopefully, Whitney Houston’s enormous talents will outlast the memories of her sad demise. Her life is now a cautionary tale for anyone who dreams of building something big and leaving a meaningful legacy.

Whitney Houston Photo via Shutterstock

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His proposed “Startup America Legislative Agenda,” would eliminate taxes on capital gains in investments in small businesses and provide a 10 percent income tax credit on for new hires or to spur job-creation, double the deductions a startup business could take from $5,000 to $10,000, and extend 100 percent first-year depreciation for qualified property. The President will offer details of his proposals in the fiscal 2013 budget that will be submitted to Congress on February 13.

In an election year in which the economy will likely be the determining factor, both Democrats and Republicans will want to be seen as supporting small business, and cutting taxes is always popular with the electorate.

The White House sees small business growth as a primary driver of the economy. In fact, my company has been providing data on loan approval rates at big banks, small banks, credit unions and other alternative lenders to the President’s Council of Economic Advisers for the past several months. While the economy has risen above the dark period in early 2009 when the country was in a tailspin, the recovery is far from complete.

Credit markets are still tight for entrepreneurs, and big banks, in particular, are making it more and more difficult for startups. For example, many ask for three years’ worth of financial data before granting loans. How can a startup provide such numbers? Therein lies the challenge.

President Obama is positioning himself as an advocate for entrepreneurship and innovation. It is a good platform for reelection. Recently, he elevated Karen Mills, head of the Small Business Administration (SBA), to be a member of his cabinet. The President called this decision:

“A symbol of how important it is for us to spur entrepreneurship, to help startups, to move aggressively so that we can assure more companies that create the most jobs in our economy.”

The SBA has been instrumental in getting funding for startups, particularly during a period when financial institutions have been reluctant to lend. The agency’s 90 percent loan guarantee program was very successful, and only a very small percentage of SBA-backed loans defaulted.

Although it is admirable that the President is trying to be innovative, I believe the government’s most effective vehicle to help small companies has been the SBA, which was created by President Eisenhower almost 50 years ago. Ironically, it has been the Republicans who have called for the scaling back of the agency. President Obama has repeatedly bolstered the SBA, and its loan programs have helped countless businesses get the funding they need for growth.

President Obama Photo via Shutterstock

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The big story in small business lending continues to be the activity of alternative lenders — credit unions, as well as Community Development Financial Institutions (CDFI), micro lenders, and others. They approved 62.2% of the funding requests , a rise from 62% in November. Within the alternative lender category, credit unions became increasingly active in small business lending in 2011. Credit unions granted 57.4% of small business funding requests up from 57% in November. December loan approvals by small banks increased to 47.1%, their highest rate of the year, up from 47% in November.

Optimism is on the rise as the year begins. We have seen a 30% increase in the volume of new loan applications, which is a good sign. Big banks were the only category of lender that dipped at the end of 2011. Approvals by banks with assets between $10- $50 billion fell in December to 9.7%, thereby reversing a three-month upward trend.

Large banks are coming back in the market, albeit cautiously. However, the big banks wanted to shore up their capital base at end of 2011 and thus reduced their outstanding loan portfolio in December. They are continuing to monitor the European financial crisis, as well as the debt battle in Congress. National and international issues impact big banks more than smaller lenders.

2011 Big Bank ($10B+ assets): Approval %, Small Bank Approval %, Credit Union Approval %, Alternative Lenders Approval %:

January:  12.8% - 43.5% - 48.9% - 49.3%
February:  11.9% - 43.9% - 49.1% – 51.6%
March:  11.6% - 44.2% – 48.8% – 51.9%
April:  10.4% – 44.6% – 50.1% – 53.6%
May:  9.8% - 45.0% – 51.2% - 53.8%
June:  8.9% - 42.5% – 52.3% – 54.9%
July:  9.8% - 44.9% – 53.4% – 52.2%
August:  9.4% - 43.8% – 54.2% – 58.0%
September:  9.2% - 45.1% – 55.5% – 61.5%
October:  9.3% - 46.3% – 56.6% – 61.8%
November:  10.0% - 47.0% – 57.0% – 62.0%
December:  9.7% – 47.1% – 57.4% – 62.2%

* Banks with more than $10 billion in assets are classified as “big banks.”
* Credit Unions are considered “alternative lenders.”
* The “alternative lenders” category includes credit unions, Community Development Financial Institutions (CDFI), micro lenders, accounts receivable financers, and others.

The top story in small business lending is the aggressiveness of alternative lenders and continued flip flops on part of big banks in their lending policies to small businesses. Further, we have noticed an increase in startups looking for funding. Startups have an easier time securing capital from smaller banks and alternative lenders. Bigger banks are more stringent and usually seek to fund only businesses that can produce documentation that they have been operating for more than two years. Obviously, a startup cannot do that. So entrepreneurs are going elsewhere for money.

Based on what I am seeing, if you are a small business seeking funding from a bank, my advice is to think small – not big.

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Loan Approvals Rising at Small Banks and Alternative Lenders