At the top of those lists of reasons why businesses fail are:

• Poor or lacking leadership.
• Inadequate or non-existent marketing plan(s).
• Not enough access to capital.

I would totally agree with the lenders and accountants of the world who also warn against excessive debt. But let’s remember that the excessive debt conversation is almost always about people who use capital poorly. I’ve yet to read case studies about business owners who properly acquired their small business loan or line of credit, then used the financing wisely and strategically, and then failed due to excessive debt.

So if we believe that financing, when acquired and used wisely, can be a great growth and expansion tool – what are the 3 most common mistakes that entrepreneurs and small business owners make that makes it difficult or impossible for them to get approved for financing? And what happens when these mistakes are made?

We see several hundred requests for financing each and every month. Here are 3 things that will hurt your chances of getting that small business loan approved.

Ways to Get Your Small Business Loan Denied

Lack of Strategy

You don’t know what your borrowing options are. So you apply for a loan(s) without having any knowledge or strategy behind the plan. In other words, there is no plan.

A plan would mean that you know what you can and can’t do, based on the lending solutions that are available to small business owners. When you boil it all down, there are probably 10-12 primary types of debt solutions that do not require you to give up ownership of your business. Do you know what those are and which ones are the best fit for you? Things like credit, industry, seasoning, location, collateral, cash-flow, reserves, your need/purpose, etc. will all be factors that determine your options.

Bottom line: With knowledge there is a path forward for you that either gets you that coveted financing now – or later. Get on that path and pursue your objective with a plan. Investigate startup financing options.

Failure to Treat Your Credit as an Asset

You’re not treating your credit as the asset that it is – or could be. There are a couple of simple facts here. You either have excellent credit that is robust with no blemishes, and low utilization on your credit cards – or you don’t.

If you are part of the 10-20% that have this excellent credit profile, are you protecting and preserving it as you start, build and grow your business? If you’re part of the 80-90% who have one or more issues with your credit (derogatory items, high revolving debt, etc.), what are you doing to intentionally improve your credit profile and FICO scores?

In the world of small business loans, you may not have as many options as you think just because you have great credit. But there are some good options when your credit isn’t so great.

The most common error here for small business owners is the improper use of credit cards. Don’t use personal credit cards for business. Why? One reason is because 30% of your FICO score is determined by your utilization percentage. Using personal cards guarantees you will hurt your credit profile and FICO scores. Ouch. Additionally, not all business cards are created equal. Some business credit cards report every month to your personal credit report. Ouch again. Don’t believe the hype about using personal cards for business because of their protection under the CARD Act.

Rates are higher since the CARD Act and you’ll hurt your credit if you use personal cards for your business. If you think you’re okay because you pay your bill in full each month, then think again. Credit card companies report the balances to the credit bureaus when they cut your statement and not after your due date. So 9 times out of 10, your balances are going to show on your credit report and lower your FICO scores. Paying your bill “on time” or “in full” will not change that.

Failure to Build and Grow Your Revenue

You’re not building and growing your revenue. It’s true that your financing options will increase and get better as your business gets older. However, this is mainly true if you’re growing your company revenue. Remember, Peter Drucker said that business all boils down to innovation and marketing and it’s your marketing plan (did I have the nerve to say “plan”) that will help you grow revenues.

Do this and your success, for both your business and financing needs, are within reach. Plans require research. They mean nothing without execution. So your research should bring you to marketing solutions like inbound marketing, content marketing, direct mail, etc.

These are the three things that are commonly ignored by small business owners as they grow their companies. Be informed. Knowledge is power. Leaders learn and grow and figure things out. So put yourself in the minority by being prepared for the financing you need to get your business to the next level.

Nobody said it was easy. But it’s also not rocket science…thank goodness for that.

Denied Photo via Shutterstock

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One company that is doing their part is Accion.  Accion is a global nonprofit micro lender.  Their stated vision is to build a financially inclusive world with access to economic opportunity for all.

They recently announced their Sandy Recovery Business Loan Program.  It’s geared toward individuals who own businesses who have been hit and impacted by Hurricane Sandy.  The loans range from $1,000 up to $25,000.

One great thing about Accion is that they are a non-bank micro-lender.  That means they have much more flexible underwriting criteria than banks and they obviously don’t shy away from small loans.

Also, for the first 3 months you make no payments and pay 0% interest.  After 3 months the loan locks in at 4.99% for up to 48 months.  There are no prepayment penalties and the loan closing costs are a standard 3-5% with a $30 application fee that’s only paid if you’re approved.

The basic criteria are pretty simple:

• They want FICO scores of 525 and above.
• If you have any past due debts it must be less than $3000.
• You must show adequate cash-flow to support the loan payments.
• No bankruptcies in the last 12 months or foreclosures in the last 24 months.
• No late payments on your rent/mortgage in the last 12 months.
• At least 6 months of sales history.
• You must own fewer than 4 mortgaged properties.

This is pretty basic stuff but, as with any loan application, there is no guarantee that you’ll be approved.  The hardest criteria may be that you need to be in an area impacted by Sandy.

This is very cheap money…get it now if you’ve been impacted by the hurricane.  Accion is a great organization that is doing great things globally.  Be part of that while you rebuild your life and business!

Hurricane Sandy, Brooklyn, New York Photo via Shutterstock

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We’re really not here to talk about the bad news because you already know the bad news.  It’s tough – some would say impossible – to get financing when your personal credit is “not so great.”  After all, it’s been tough enough since The Great Recession for people with “good” credit to get financing.

Just to clarify, we’re talking about debt financing and not equity financing.  This post will not cover equity financing options such as venture capital, private equity, angel investors, or the three F’s (friends/family/fools).

Before we get started, let’s review a couple important truths:

• One is that your personal credit is either an asset or a liability.  It’s not neutral because, if you’re like most of us, you’ll want or need credit to do things like buy homes, obtain credit cards, get business financing, etc.  Your credit is not neutral, it’s either an asset or a liability.  If it’s an asset then keep it that way and if it’s a liability then don’t be guilty of the definition of insanity and continue doing the same things you’ve always done and then expect different results.  Do something about it.
• Two, you may want to consider an ownership strategy if you are married and your spouse has better credit than you.  More about husband & wife “insider” tips here.

Now, let’s dive into the best small business financing options for people with “not so great” credit:

ROB’s (Rollover as Business Startups)

This works for both new and established businesses.  If you have an IRA, 401k, or other qualified retirement vehicle then you may be able to roll some or all of those funds into your new business entity.  You’ll need a C-corp and this strategy should only be executed by a qualified and experienced company or attorney.  There are no monthly payment requirements but be sure you have good people who properly set this up for you so you don’t run into IRS compliance issues.

Equipment Financing

This works for both new and established businesses.  You’re looking for a non-bank equipment finance company here.  There are many of them out there who will lend you the funds you need to buy construction equipment, medical equipment, tractor trailers, aircraft, printing equipment, etc.  The list goes on.  They look for clients with damaged credit and what you’ll need in return is very simple.  You either need a larger down payment or collateral or both.

These lenders like to lend based on the “auction value” of the equipment you’re buying and/or the auction value of some equipment you already own.  Although it goes without saying, you should expect to pay a higher cost for these loans.

Factoring

This works for established businesses only.  It’s simple here too.  If you have an aging report or book of receivables then there are lenders out there who will buy your receivables at a discount (some or all of your receivables).

Qualifying for factoring is all about the company who owes you the money.  If the lender believes they will pay, then you’ll probably get your financing.  However, if it’s Uncle Louie from Louie, Inc. who owes you $100,000 you probably won’t be able to finance that one.  I’m sure you get the idea.

The lender will check things like business credit reports on the company who owes your invoice(s), make verification phone calls, etc. but it’s a quick solution and there are thousands of businesses all over the country who do this very successfully.

Merchant Cash Advances

Also known as MCA’s, works for established businesses only.  This is probably one of my least-favorite forms of financing because it’s so expensive but there is a time and a place for it.

We’re talking about the Wild West of financing here though.  If you’re working with a trusted small business loan professional then you’re probably okay but these loans are a dangerous combination of two things – they are costly to the business owner and lucrative to the brokers who sell them.  They are tough on cash flow no matter how you slice it but if you can absorb the high-cost and the short repayment term and advance your organization then this is an option.

To give you some perspective, our company takes in around 5,000 requests for financing per year and in the last 2 years, you can count the number of MCA’s we’ve done in the single digits.  For each of those clients it was a means to an end to achieve a larger goal.  They’re an option, but use them wisely.

Purchase Order Financing

Also known as PO Financing, works for established businesses only.  Of these five lending solutions this one is done with the least frequency.  However, it’s a great option when you have a large order you need to fulfill from a large customer.

For example, if Target gives you an order for 500,000 of your widgets to go in all their stores on the east coast, then you’ll need to manufacture and ship those widgets to them before they ever pay you.  You will also need to pay all your people or the manufacturer for the production.  That can get expensive and many business owners have had their growth halted simply because they couldn’t afford to fulfill a big order.

With PO Financing, as long as you have a credit-worthy buyer, you can finance that entire order and ensure that your business grows and that you can develop the relationship with the buyer for future orders.

And there you have it.  These are not the “only” ways to obtain financing if you are a small business owner with damaged personal credit, but these are likely your best options – or they are at least the most commonly used financing vehicles for people with “not so great” credit. The list could certainly be longer.

So how have you creatively financed your business growth?

Credit Problems Photo via Shutterstock

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But if cash-flow is king, then are we prepared for the times when our cash-flow isn’t so awesome?

Before we dive in let’s see if we can agree on something.  Financing is always a means to an end.  In other words, nobody gets a loan for no reason and for no purpose.  We use it to buy properties, equipment, and for working capital among other things.  If we had the cash reserves that Apple has then we probably wouldn’t be trying to figure out how to get an SBA loan or how to get a working capital line of credit. At its best we use financing as a tool to start, build, and grow our businesses and at its worst we use it to stay afloat when times are tough.

Below are four key ingredients that will not only have you prepared for slow times and unexpected cash-flow crisis, but they will also help you be prepared to obtain your financing in the future as your business grows and has additional financing needs to support that growth:

When Possible, Get Your Financing “Before” You Need It

It may sound counter-intuitive, but it’s simple. You can’t get a real estate loan or equipment financing “before” you need it. However, you can [and should] get your working capital line or lines of credit before you need them.

If you’re like most people you’re familiar with the loan process because you’ve probably bought homes and cars and got loans to pay them off over time. If you’re obtaining a loan then you’ll normally want to wait until you “need” the funding because loans require you to make monthly payments regardless of what the money is being used for. Whereas a line of credit has no monthly payments until you draw on the funds and begin using them. There’s a big difference between loans and lines of credit.

Be Sure You Understand The Options That YOU Can Employ

We all have different options based on things like our industry, geographic location, collateral, business seasoning, personal and business credit, etc. Do you know what you can and can’t do? This is important or you’ll make one of two mistakes. You’ll either get the wrong type of financing or your confusion will lead to fear and paralysis.

Doing nothing is worse than making the wrong decision because there’s no action when you do nothing. Action at least means you’re moving and you can change course or learn from mistakes but never getting into the game and making decisions is a crime punishable by you never reaching your goals and dreams. Learn your options and take advantage of them.

Use Your Credit Cards The Right Way

This may seem odd but it’s one of those things that nobody really talks about. Statistically, according to NFIB, 79% of small business owners use credit cards (PDF). Meredith Whitney says that 82% of small business owners use credit cards as a “vital part” of their overall funding strategy.

The problem is that most small business owners use credit cards the wrong way. That means they don’t separate their personal and business credit with their credit cards, they hurt their personal credit profiles and FICO scores, and they limit their ability to obtain additional financing in the future.  Credit cards are definitely a tool to help with some cash-flow issues but you’ll obviously have to cover that additional debt service in the future if you use it today to get out of a cash-flow crunch.  I’ve done it, as have many others, but do it responsibly.

Protect, Preserve And Build Your Personal And Business Credit

We all know that credit is important for mortgages, car loans, business loans, and many other areas of our lives but, what are you doing to either preserve it or improve it? Are you treating your credit as an asset and protecting and preserving it? Do you know “how” to do that?

Monitoring your credit, cleaning up errors, and not over-utilizing your credit cards (the ones that show up on your personal credit report) are all ways to start treating your personal credit as an asset. Business credit is a different animal and will likely require a strategic build.

Business credit doesn’t “just happen” the same way your personal credit does.  It’s usually a process of strategically acquiring a series of vendor lines of credit for things like office supplies, computers, gas, etc. It takes time and the rewards rarely come quickly but you’ll be glad you did it if you stick with it.

We recently bought a new phone system and, because of our good business credit, I didn’t have to personally guarantee the loan and they only looked at our business credit in order for us to get approved – they did not review my personal credit as part of their underwriting process.

Businesses have cash-flow cycles – and it’s not just the “seasonal” businesses. It comes with the territory and especially as you are building the organization. Use some of these strategies to be prepared to deal with that slow month (or more). It’s never fun to deal with the curve balls that running a business throws at us but if you do these things and execute them properly you’ll set yourself up to hit the curve balls and stay in the game rather than striking out.

If cash-flow is king, what are you going to do about managing the tough times when the cash-flow is slow?

Key to Solution Photo via Shutterstock

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In fact, right now there is a lot of talk about Dr. Doom’s “perfect storm scenario” that Nouriel Roubini says is beginning to play out.  Months ago, Roubini talked about the combination of stalling U.S. growth, debt troubles in Europe, the slowdown in several emerging markets (led by China), and military conflict in Iran causing a “perfect storm” that would impact the global economy.

The recent reports of softer than expected job growth in the U.S. and the inflation report from China are fueling speculation that Roubini may once again be onto something.

We also know how important it is for small business owners to be able to access loans and lines of credit as they start, build, and grow their businesses.  Studies have shown that small business owners are hesitant to do things like hire additional employees and increase benefits to their employees when they cannot access capital.  They go into “survival” mode and do not expand and grow because the risk is too great.

According to the Keybridge Research study, the impact of credit card usage and specifically business credit cards on small business growth is very real and quantifiable.  According to this study they found that for every $1,000 of credit card use for small business owners there is an average of $5,500 in increased firm revenue.  Additionally, from the years 2003 to 2008, they estimate that the expansion of credit card lending in the U.S. contributed to the creation of 1.6 million U.S. jobs.

Don’t underestimate the impact of these numbers – credit card borrowing is by far the #1 source of financing for small business owners.

According to the National Federation of Independent Business, 79% of small business owners use credit cards to run their business.  It’s actually down from 2008 when that number was 85%.  So it’s not only true that credit cards are a vital part of the overall funding strategy for small business owners, but in some cases, it’s the only form of credit they really have.

That’s why the recent news about credit card delinquencies is a bright spot in an otherwise dim economic forecast for small business owners.  According to a recent Reuters report, credit card delinquencies are down significantly – to the tune of being at low’s we haven’t seen in over 20 years.  This is surprising since it’s previously been believed that there was a correlation between unemployment and credit card delinquencies.

Despite the unemployment numbers still not being very encouraging, the percentage of credit card delinquencies has continued to get lower and lower.  Unemployment was at 10.0% at its recession-peak in October 2009.  Through the first 6 months of 2012 the rate has bounced back and forth between 8.1% – 8.3% so no real progress this year.

So what does all of this mean?  Well, I agree with the concerns shared by most about the state of small business today.  There are concerns galore.  However, with credit cards, we’re talking about the #1 form of financing that is used by nearly 4 out of 5 small business owners.

The banks are back to making nice profits in their credit card divisions and the write-offs are at historic lows so you’re going to see some slight adjustments made by lenders to extend more credit.  But here’s the key – they are going to do it to the “credit-worthy” consumers and small business owners.

Unfortunately the CARD Act has hurt small business owners so keep in mind that lenders are beginning to slowly get more generous with their credit lines on credit cards but you’ll still continue to see higher rates after the 0% introductory offers end.  Most of the people who seem to defend the CARD Act were the people who lobbied and pushed for it in the first place but here’s a good article from Forbes for those of you who aren’t clear on it’s negative impacts.

Fundamentally, the CARD Act brought regulation at a time when the market and our economy needed liquidity, the equivalent of going on a pasta diet when you need to reduce carbs!

Credit cards are a great financing tool for small business owners and sometimes it’s actually their only option.  I realize there’s an army of people out there who don’t like credit cards and that’s okay but they are like anything else – they can be used the right way or the wrong way as you build your business.

Where else can you find low-cost financing (0% intro offers are as good as it get’s and there are millions who have maintained very reasonable interest rates on their credit cards despite what CARD Act proponents may claim), not need collateral, have quite reasonable monthly payments, along with flexibility of monthly payments that is invaluable to a small business owner who is managing cash flow?

We don’t have time here to talk about the involved process of choosing the correct small business credit card but it’s clear that the prospect of some very slight loosening of the underwriting criteria has already happened in the credit card space and with the state of the overall economy let’s celebrate a small victory that will have a very positive ripple effect for small businesses everywhere!

Perfect Storm Photo via Shutterstock

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The fact of the matter is that the lessons are usually in the failures.  Bill Gates himself said that success is a lousy teacher.  Now, don’t get me wrong, I’m not suggesting you look to fail for the sake of learning lessons.  The failures will come along the way to success in business and in life so IF you want to start, build, or grow a business, just be prepared for some failures along the way.

Build for the long-term.  Invest in yourself and your business.  Be a student of your craft.  Become an expert.

I personally think it’s hard to argue that two of the most important ingredients of business success are leadership and credit (both personal and business credit).  Cash, education, and having good people around you might round out the top five.  You don’t need all of these ingredients to succeed in business but I’m not sure you could find me a successful business owner that didn’t have at least some combination of these necessary ingredients.  Having as many of these ingredients as possible will help you weather your storms.

Our company has some clients who are real estate investors.  As of the date of writing this article, it is arguably one of the best times ever to buy real estate.  Some would argue that we’re in the midst of the best time ever to buy discounted real estate.  They’re not making any more land and the population continues to grow.  There will certainly be peaks and valleys along the way but, bottom line, real estate over time increases in value. To that end, we all need a roof over our head.  So you do the math and tell me if real estate is a good or bad long-term investment.

Again, any good thing can get messed up and done the wrong way but we’re not talking about a business that’s already seen its best days like some industries (like manufacturing and industrial businesses perhaps).  I do not think it is a business for everyone but it is certainly a good business for someone who will treat it like a business and not a weekend hobby.

I say all of that to say that even in a great industry, at a great time, with a bright future, it’s easy to find reasons “not” to buy real estate right now.  Watch the news, talk to a former investor who was “speculating” and lost everything, or try doing it on your own without good mentoring.  All these will discourage you if you let them and fear will jump into the driver’s seat and a year later you will still be in the same place you are today.

For today’s serious real estate investor there are deals, deals, and more deals out there.  So, as a good friend of mine likes to say, ”whatchu gonna do?”  It’s all in the action.

Think about it like this, if you do 100 deals you’re going to have some that make money and some that don’t.  But you’ll certainly have more winning deals than losing one’s unless you don’t learn from your mistakes and repeat the same mistakes that caused you to lose money.  Will you get discouraged if your first deal doesn’t make you the money you wanted or planned on?  Most people throw in the towel if things don’t go as planned – fear gets the best of them.

I recently heard a story from a real estate agent who took a new client into a property that was inherited by heirs of an estate.  The client was a new real estate investor who was looking for a “fixer-upper.”  The sellers (the heirs of the property) were in another state and had no interest in real estate and simply wanted to liquidate and have nothing to do with managing a vacant property.  The house was structurally very good and was in a good neighborhood but it was outdated.  The sellers were “negotiable” on the $95,000 price (which was already aggressive since the sellers just wanted to unload it).  The estimate to replace the wood paneling, drop ceilings, install new kitchen cabinets, new carpet, and update the bathroom was about $25,000.  The houses in that neighborhood sell in the $200,000 – $250,000 range because it is a solid area with good schools and low crime.  Because of the condition of the property (mainly the bathrooms not working well) the agent said it would not qualify for FHA financing so they were targeting an investor to buy it.

When the agent took the new investor through the property he seemed concerned about what he would find after they took off the wood paneling and pulled up the old carpets.  He told the agent he would “think about it” and get back to her.  When he called her back 3 weeks later to go “look at the property again” the agent informed him that it was already sold.  Apparently, it was put under contract for $90,000 and then went to settlement 2 weeks later with the end buyer being an investor who paid $105,000.  The buyer was a seasoned real estate investor who bought the property from the person who got the contract for $90,000 (the wholesaler).  The wholesaler had sold other properties to this investor and because of their good relationship, the property was purchased without the buyer doing an inspection.

Which one of these businesses are you?  There’s the tire kicker who was obviously motivated by fear who wanted to “look again” after 3 weeks, the wholesaler who got the property under contract for $90k and made a quick $15k, and the final buyer who paid $105k and will easily make over $50k in profit or equity from the deal (after some good, honest hard work and labor of course).

Fear is a great crutch.  You can lean on it whenever you need an excuse.  The problem with the crutch is that if you lean on it forever you may never do without it.  It’s like a security blanket if you don’t wean off of it.  How many of your decisions are influenced by fear?

Who’s the CEO of your business?

Fear Photo via Shutterstock

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According to Webster’s Dictionary, the number one definition of fear is:

“To be afraid or feel anxious or apprehensive about a possible or probable situation or event, “I fear she might get aggressive.”

Fear.  It can be a good thing.  It can be a bad thing.  It can also live and grow and appear at opportune times in the life of a business owner and, when it goes unnoticed and when it is not recognized and purposely silenced, it can be the worst of all companions.

In our daily dealings with business owners (both new and established businesses) there are many manifestations of fear that we are able to witness.  The fear of making the wrong decision.  The fear of losing money.  The fear of this and the fear of that…the list goes on.  But if you boil it all down to its core there’s one main fear that all of us have felt, experienced, and deal with almost daily and that is the fear of failure.  That’s it.  The fear of what happens if “my” business fails?  None of us like to fail.  What will our friends say or think?  What does this mean for my family?  How will it affect my future?  Will others think less of me?

The Fear of Failure.  Fear can become your CEO if you’re not careful.  In fact, fear will become your CEO if you don’t face up to your fears.

Steve Jobs.  Bill Gates.  Michael Jordan.  Muhammad Ali.  Henry Ford.  Jack Welch.  Read what some of them have said about fear.  Do some Internet searches.  You’re not alone.  They all have or had the same fears that you face.

What does fear do?  It does many things.  In fact, in extreme cases, it can lead to things such as obsessive-compulsive disorder.  Spend 5 minutes reading about Howard Hughes in his later years if you want to see an “extreme” illustration of anxiety and fear.  However, that’s not most of us.  There’s an extreme that knows no fear and there’s the Howard Hughes extreme that becomes reclusive and lives out his days in isolation and in hotel suites afraid to touch anything.  Most of us live somewhere between these two extremes.

To feel fear, anxiousness, and apprehension is 100% normal.  What you do about those feelings is what separates us…that’s what separates the men from the boys so to speak.  Fear’s biggest manifestation is paralysis.  Because I’m afraid of failure I do nothing.  It’s “safe” to do nothing.  I can’t fail if I don’t do anything.  I honestly think that, often times, it’s the “doing nothing” that allows people to sleep at night.  Why?  Because we end up doing the same thing today that we did yesterday and our world doesn’t change.

It’s predictable.  We can “plan” and “control” our days and our lives so much easier this way.  There’s no “X” factor because tomorrow will be the same as today and yesterday and there’s comfort in that.

My question to you is simple, is that what you want?  If it is that’s fine.  There’s nothing at all wrong with that.  Here comes the famous if/then statement…if you want predictable…if you want the same thing tomorrow that you had yesterday…then “maybe” running a business is not for you.  It may not be what you’re looking for.

However, if you still want to forge ahead with running your business then I think we all know what we have to do with the bully who keeps stealing OUR lunch.  Face up to him.  Look fear in the eye and recognize his role in your decision-making.  It’s time to recognize that some, perhaps many, of our decisions are motivated by fear.  We cannot…let me repeat that…we cannot build or run our businesses if fear is in the driver’s seat or if we’re afraid of making a mistake.

I personally have a growing business and I can assure you that you WILL make mistakes.  I’ve made many mistakes…whew, if I added up the mistakes, that would be a long list.  But we’ve made many more good decisions that have helped us to grow.  And we’ve learned and we continue to learn from the mistakes.

Quotes from Michael Jordan:

“I can accept failure.  Everyone fails at something.  But I can’t accept not trying.”

“I’ve failed over and over and over again in my life, and that is why I succeed.”

Stay tuned for part 2 – Fear Factor 201.

Fear Photo via Shutterstock

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It was August, 2010 when the stuff kinda hit the fan as they say.  That’s when Wells Fargo had to shell out $203 million after losing a lawsuit over their deceptive overdraft fee policies.  It’s a little known trick called reordering or high-to-low resequencing.  It basically means that a bank will settle out each day by ordering each of the transactions in a descending order from largest transaction to smallest.  It may not be a big deal, but what if you became overdrawn on your account?

You were out and about on a beautiful Saturday afternoon and bought lunch, grabbed some snacks, picked up a new shirt for work, saw a great deal on some shoes, and then capped it all off with a cappuccino/latte/espresso (as expressed by a non-coffee drinker who prefers his caffeine in the form of multiple diet cokes).  But that was all in preparation for buying that new 50 inch plasma TV that’s on sale at Best Buy.  You know payday is on Monday and your account is a little tight, but even if the purchase at Best Buy puts you a couple hundred bucks in the red you figure the overdraft charge is only $35 plus you get paid on Monday…heck, it’s the weekend and maybe you won’t even get hit with the $35 fee.

Well, think again.  Try $35 x 6 for a total of $210 in fees!  It’s because the bank calculated the largest transaction (the plasma TV) first and then all those other transactions – even though they happened sooner – after the large transaction so by their calculations every transaction that day was subject to a $35 overdraft fee.

The Wells Fargo decision by Judge William Alsup got additional attention simply because of how outspoken Alsup was.  He called the Wells Fargo practices “gouging and profiteering.”  He didn’t stop there and went on to say:

“Internal bank memos and e-mails leave no doubt that, overdraft revenue being a big profit center, the bank’s dominant, indeed sole motive was to maximize the number of overdrafts.”

Then we’ve seen other banks settle class-action lawsuits like Bank of America who settled in Nov. 2011 for $410 million on this overdraft issue and Chase in Feb. 2012 for $110 million.  Eileen Smith covered the topic well in a recent article about TD Bank’s charges.

In fact, here’s a list of banks currently involved in lawsuits over excessive overdraft fees.  There’s a decent chance your bank is on the list.  Of course, the penalties are basically a slap on the wrist when you consider the profits that have been made on overdraft fees.  It’s estimated by the Consumer Financial Protection Bureau (CFPB) that banks made between $15 billion and $22 billion in 2011 from overdraft fees.  That’s down from much higher estimates in previous years.  According to American Banker, Chase made $500 million a year in post-tax income from high-to-low resequencing.

How would you feel if your financial planner or accountant treated you and your money like this?  You would leave him/her in a heartbeat and never let someone like that manage your money again…and why is this behavior from a bank somehow acceptable?

So where are we now with all of this?  It’s a good question.  There are obviously many class-action lawsuits in the works and the practice of reordering debits or high-to-low resequencing has been illegal since July, 2011.  The CFPB announced in late Feb that they are investigating banks’ deceptive overdraft practices.  I’m sure the banks will find other ways to generate that precious fee income and they’ve obviously been exploring with ideas already as we’ve all been hearing about.

It may be time to join the growing army of small businesses who are leaving the big banks for smaller banks and credit unions.

Banker Photo via Shutterstock

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The jobs report that came out today said that unemployment is at a 3 year low of 8.3% – according to the Bureau of Labor Statistics – and that we added 243,000 private sector jobs in January.  Not sure about you but I like that.  The market was looking for 150,000 new jobs so expectations were exceeded. I realize it’s not the 4.5% unemployment we had in 2Q 2007 but it’s also not the 10.0% we had in 4Q 2009 so we’re heading in a better direction.  And, yes, I agree that we have a long way to go but I like the current trend.

What else am I (cautiously) optimistic about?  Small business lending is slowly beginning to come back.  About 15 months ago we heard from Bank of America that they planned to hire 1000 people primarily dedicated to the small business sector by 2012.  Citi announced some impressive “results” – and, by the way BofA, you get more cool points for results than you do for intentions!  Chase has also recently announced some great strides in the small business lending “results” category.

I agree with my friends and colleagues who contend that it was the local banks and smaller banks who helped us through The Great Recession with their SBA-backed lending efforts so I mean no slight to them when I say I’m happy about the direction of lending in the big-bank category.

So while the Negative Nancy’s are rolling their eyes at me and the Positive Peggy’s are ready for the big celebration here’s why neither of those extreme’s is the right place to be.  8.3% is still too high and we want a lower unemployment rate.  Additionally, since we live in a global economy where ripple effects cross borders and can circle the globe, the larger concern is how the European debt defaults will impact both the world and the US economy.  Greece is close to a likely default in the next month or two and some of their neighboring countries are looking at the same issue on the not-too-distant horizon.

Let’s not forget the global impact that was felt by our own US subprime mortgage defaults that have all occurred just in the last 5 years.  Wasn’t it Ben Bernanke or Alan Greenspan that said, “It’s a global economy, dude?”  Okay, maybe not but you get the point.

If the trend of lower unemployment continues like it has for the last 6 months then we’re all likely to be happy.  Housing is still not good but can you imagine what would happen if more people get back to work and then those same people buy or refinance their homes since rates are at historic lows and then that creates more jobs in banking and lending and the unemployment percentage continues to decrease even more?

That’s one reason the Fed is keeping rates low – let’s call it the New Fed Stimulus Package or the NFSP…what do you think?  I like how William Dunkelberg from the NFIB summed it up “The market was looking for 150,000 jobs, and we got 257,000.  We’ll rejoice, and hope for another good month next month.”

Job Photo via Shutterstock

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Before we talk about the “good news” let’s do a quick history lesson about how we got here.  Some would say it started with the secondary mortgage market.  As mortgages got closed, lenders were able to sell their mortgages on the secondary mortgage market and wall street turned them into mortgage bonds.  As real estate prices increased and mortgage rates decreased and profits were flowing through wall street the “appetite” for these mortgage bonds increased.  Then you join that with deteriorating underwriting criteria along with a staggering number of sub-prime loans to non-credit-worthy borrowers and we’ve got problems.

But how did this happen?  It happened because the ratings agencies (Fitch, Moody’s, and Standard & Poore’s) were giving the same grade to the pools of sub-prime mortgages as they were to the “prime” or “A-Paper” mortgages so these bad mortgages flowed through the system just like any other mortgage.  As the defaults hit certain levels, the investors who shorted mortgages by buying insurance against the bad mortgages were able to cash in – this is where you Google search “who is John Paulson” or you could try “what did AIG do wrong?”

History lesson almost over – but what happens next?  It’s called TARP or the Troubled Assets Relief Program.  TARP is where Uncle Ben (Bernanke) drew on the lessons of The Great Depression of the 1930′s so we didn’t repeat our mistakes.  The Fed actually turned a recession into The Great Depression in 1929 by letting the money supply contract very sharply which caused prices to fall and inflation to hit.

Secondly, they let the banks fail and thousands of banks actually failed.  TARP was a conscious effort to let the banks recover first because if the banks fail then we all fail and we propel ourselves into a much worse economic climate.  TARP was an infusion of capital into the top banks – yes, it’s 100% true that it was “unfair” to the smaller banks – in an effort to get them to continue to lend (or at least to not totally shut down their lending).  Interestingly, tax payers made money on TARP but, of course, that hasn’t been talked about in the “occupy” movements.

So here we are a few years after TARP.  Fortunately, The Great Recession did not become a depression.

According to CardWeb, $4.5 billion was extended to small business owners in 2009 by Citi.  Then they increased that to $6 billion in 2010.  Then they pledged to lend $24 billion to small business (defined by them as businesses with less than $20 million in annual revenue) over a three year period from 2011 – 2013.  Citi announced last week that they are ahead of pace on their goal of lending $7.0 billion in 2011.  They finished the calendar year very strong after a slow summer and ended up lending $7.9 billion in 2011 to small businesses.

I agree that there’s a lot more to be done.  However, if we put mistakes of the past aside, this is one lender who is showing us progress and who intends to continue to lend at a much more generous pace than we saw in 2008 and 2009.

Lending Photo via Shutterstock

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