A Treasury report released on December 15, 2009 showed that major banks decreased their business loan balances by $1 billion in October, CNNMoney.com says.
Starting in April, the 22 banks that received TARP funds as part of the federal government’s bank bailout had to start filing monthly reports with the Treasury Department. Since then, total small-business lending by the banks declined by 11.6 percent.
The report came out a day after President Obama met with leaders of some of the nation’s biggest banks to urge them to increase lending. President Obama had another banker gathering on December 22, to host a discussion with representatives of several community banks.
There are some signs that banks are responding to the pressure. After decreasing its small-business loan balance every month since April, Bank of America announced last week that it plans to loan $5 billion more in 2010 than in 2009.
Wells Fargo has also declared it will increase small-business lending by 25 percent compared to 2009. Although its lending has declined by 4 percent since April, Wells Fargo still makes more small-business loans than any other bank. Wells Fargo has pledged to increase overall lending by 25 percent in 2010 compared to 2009. Marc Bernstein, head of Wells Fargo’s small-business unit, says the bank is optimistic that the economy will pick up in 2010 and that there will be more creditworthy small businesses to loan money to.
JPMorgan Chase said in November that it would increase small-business lending by as much as $4 billion in 2010; it also has a new line of small-business credit cards, Ink, that could account for much of that amount. Chase has also announced plans to hire some 325 small-business specialists to find new small-business customers and work with existing customers.
The Wall Street Journal also reports that banks including US Bancorp and JP Morgan Chase have promised they will take second looks at small-business loan applications that were previously rejected. Bank of America and Wells Fargo, which already had “second-look” programs in place for most of 2009, are expanding those programs, hiring more staff and creating formal appeals processes.
There is money out there but you have to know how to get it. The banks are not telling you about little known programs. We are working with clients to build the biz credit score and get credit lines in their name. The process is a little longer but works almost everytime.
There is so much wrong with this report it’s hard to know where to begin. But it is a classic example once again of politicians and big business gaining another “photo op” at the hands of unsuspecting journalists who take face value what they are being told.
Let’s deconstruct some of the problems with what appears to be positive news here.
1) The SBA defines “small business” as any business under 500 employees, which constitutes 99.7% of all businesses in America, a sample size so vast as to be simply meaningless. Saying that banks are now thinking about lending more money to “small businesses” by this definition is the same as saying “banks have decided to lend more money to people under 7′ tall.” They could loan all the money to people over 6′ tall and declare they have helped small people. The same is true of this sample size. True small business with under 20 employees aren’t seeing ANY of this money.
2) The ARC loan program, conceived last February and funded in June for a paltry $255 million (1/100th of one percent of the bailout received by big business and big banks) is to date still only about 55% committed – with somewhere around $120 million of that money yet to be loaned out. The government gave big banks $800 billion in a few days last year,and another $787 billion to big business, big banks, and big government in Feb. of this year – and not a single one of those organizations would have qualified for the little $35k ARC loan. Yet none of them are willing to turn around and make sure small business is actually getting help.
3) In August Obama committed to raise the limit on SBA small business 7(a) loans from $2 million to $5 million as another photo op to pretend they were helping small business. First, it never happened – just another empty speech. And second, if it had, it would have had zero impact on the problem. True small businesses don’t need $2 million, let alone $ 5million. The problem has NEVER been the SIZE of the loan, but the availabilty of ANY loan at ANY size. Increasing the amount of loans no small business can get is ludicrous and ignores the problem. This article trumpets that same nonsense – more money is available, but those that need it won’t get it. Proof?
4) I’ve worked with dozens of small businesses to try to help them get a $35k ARC loan, which was supposed to be (according to Karen Mills, head of the SBA) for “immediate relief” of “distressed but viable businesses”. The only three I know that got them did not need them and virtually all of those rejected for the ARC loan were all offered commercial loans at very high rates along the way to not getting an ARC loan. The only businesses getting these ARC loans are businesses that don’t need them. Imagine if we had only given money to big businesses in February that did not need it? That’s what is happening to small business.
The parade of speeches, declarations, pontifications, and self-promoting but unfulfilled promises to small businesses in the last ten months is staggering and shows the open contempt politicians have for small business, along with the belief that we’re dumber than mud.
Bottom line – true small businesses under 20 employes (80% of all businesses in America) have no access to credit and all the above horn-blowing isn’t going to change any of that any time soon. Too many journalists are sitting in on political press conferences and simply writing down what the politicians are telling them. One of them would win a Pulitzer if they just bothered to check behind the curtain a few times.
Let me offer up these points:
(1) Let’s keep the credit situation in perspective. Credit is certainly harder to obtain by small businesses in the past year (and I realize that’s a VERY tough situation if YOU happen to be one of the business owners who desperately needs credit and can’t get it). But, on a market-wide sense, credit is still flowing despite difficult conditions. Ten percent reported trouble getting desired financing — a higher percentage than in the past several years — but credit is still being extended, per the latest NFIB Economic Trends report:
(2) Government loan programs have limited impact on the small business market even in good times. Why should now be any different? The annual number of SBA loans granted (<100,000 annually) is a drop in the bucket compared with the millions of small businesses out there. Likewise, the ARC loan program was so limited in volume and the individual loan amounts a paltry $35K, that they were unlikely to make an impact from the get go.
(3) When it comes to banks' pledges to lend more, I disagree with the suggestion that writing about it somehow means being co-opted. Just the opposite -- writing about their pledges is crucial if we are to hold their feet to the fire. Let's memorialize their pledges -- spread word of them far and wide -- so that it's not so easy to ignore them later. Somehow we have to get back to a culture of accountability in this country.
I really don’t understand this insistence on using debt to “help” the economy recover. If you have to rely on a credit line to run day to day business operations, maybe you need to re-think your business model.
That’s an interesting perspective, but if you believe that to be true, than every large business and bank in America and most small businesses would be out of business. The overwhelming majority of businesses use credit lines as a part of their cash flow strategy. There is a significant difference between taking on debt you can’t support and taking on a capital investment that allows you to bring in more revenue than the loan requires to pay it back.
In many cases it is bad business to not use a credit line. The wealthiest people understand the following axiom “Own nothing, control everything.” The best way to do this is to use other people’s money (banks, etc.) to fund your business.
A great example of this on a personal level is the purchase of a house. You could buy a $50,000 house with $50k cash. If it appreciates 10% in one year, you’ve made $5,000. If you put the same $50k into a house along with a $150k loan ($200k house) and it goes up 10%, you’ve made $20,000, not $5,000.
Using the bank’s money allows you to buy a much bigger house and expand the ability of your investment to grow. You don’t own it, but you control it,and as a result you make more money.
The same principles work in business. And in down times, credit can be the cashflow bridge to get a business through to the other side. I’m not sure I could say they shouldn’t take a loan that will keep them alive and allow them to begin to thrive again.
I agree with Anita, we do need more accountability in this country, from Washington, from the banks and from the small business owners themselves. We need to continue to report what the banks are “pledging” and we need to tell our representatives in Washington what we need. However, just because you’re a small business owner doesn’t mean you deserve a loan–and truthfully I’ve heard many a complaint from business owners who were turned down by the banks when they applied for a loan who didn’t deserve a dime.
Don’t get me wrong, banks need to start lending again. But business owners need to do their part and make sure their businesses are credit-worthy.
Above all we need our customers, be they consumer or business-to-business, to start buying again.
Good news for small businesses and I hope 2010 will bring some relief for the
Rieva: What’s TARP?
I must say that I like Wells Fargo’s online presence and that could be my future bank. Another great bank with a solid foundation is BB&T (Branch Banking & Trust Company). I am impressed with John Allion’s leadership at the bank.
Three very important points:
1) I do appreciate your perspective that there are small businesses looking for bailouts who don’t deserve a dime. They were taught this bad behavior by a government that gave hundreds of billions to thousands of very large businesses and banks who didn’t deserve a dime and could not have qualified for the $35k ARC loan they won’t give to credit worthy businesses today. This simply should not have happened and it set an example for small business (all business) that is untenable.
2) Anita said “Government loan programs have limited impact on the small business market even in good times. Why should now be any different?”
I couldn’t agree more that we should keep the government as far out of big and small free enterprise as we can get them. However, the reason this time is different is that they did not stay out, but threw hundreds of billions of dollars at thousands of big businesses and banks that had no business getting loans and outright bailouts. You simply cannot decide to prop up GM with $30 billion (they just asked for $3.5 billion more today), and then turn around and do nothing for true small businesses (under 20 employees), which we all know is the engine of recovery in every recession.
So it shouldn’t be different, but the government made it different by propping up part of the economy and insulting the rest with a $255 million ARC loan program that isn’t working.
3) The statistics Anita cites are not valid for this conversation. The definition of small business from the statistics she cites includes anyone under 7′ tall – all businesses under 500 employees, which only leaves out 17,000 of the 28 million businesses in America. Those stats simply tell us that owners under 7′ tall are getting loans. But which segment of those owners under 7′ tall?
I believe strongly that if research was done on this, we would find that true small businesses w/ under 20 employees (80% of all biz’s in the US), are experiencing a borrowing crisis unlike anything in American history. But since these 5 foot tall businesses are conveniently lumped in with all businesses up to 7′ tall and the whole thing is labeled “short/small”, it’s very easy to look at these stats and say “small” business isn’t doing that bad. Let’s get some real statistics regarding the 80% of businesses under 20 employees, otherwise we have to leave the “small business” stats out of this discussion.
I can give you anecdotal stats. I am in contact with thousands of true small businesses under 20 employees and have worked with dozens in the last year to get loans. I agree with Rieva – many didn’t “deserve a dime.” (I’d be interested in her view on whether the GM’s of the world should have been bailed out – my view is consistent – neither the small or big insolvent businesses should have received a dime if not credit worhty – what’s yours Rieva?).
But for every undeserving 5′ company I’ve heard from, I’ve heard from ten more that should be getting credit who are not. Worse yet, of the half dozen businesses that I am aware of that received the ARC loan, every one of them admits they did not need the money and are laughing all the way from the bank. ARC was designed for “immediate relief” of “distressed but viable” small businesses, yet I believe if someone did an analysis of who actually got these loans that this portfolio would be a higher quality portfolio of loans than any SBA loan in history. Proof? Again, it’s anecdotal, but more reliable than the 7′ tall statistics cited by Anita.
I know personally of four businesses refused an ARC loan solely on the basis of their credit ratings (in writing), all of which had credit over 750. After hearing these stories, I applied to see what the fuss was all about. My 301 page application was rejected in writing solely on the basis of my credit rating of 758, two points from perfect. (This decision was reversed after articles in CNNMoney.com and NYTimes.com highlighting my business – I have not funded this approved loan).
My stance – government should leave small business alone. I don’t expect anything from the government and firmly believe that the SBA is the worst thing that has ever happened to true small businesse because it’s focus is really mid to large size businesses (50-500 employees) and has done an extremely good job of helping them grow at the expense of true small businesses. I have challenged the SBA to study what segment of “small” actually benefits from their existence and they don’t want to because it will expose the obvious.
Here is the real rub – politicians and banks continue to pretend they are helping those true small businesses, using us for photo ops to prop up their public image. The above article is another example (yes, you should report, but you should question as well and include a history of how these “vows” have worked out so far).
The unending parade of speeches, forums, conferences, seminars, and advisory panels that the government trots out are simply photo ops to pretend to help true small businesses. Then they cite the “all businesses under 7′ tall” statistics as Anita did to “prove” that they are helping businesses under 5′ tall. Ludicrous, but veiled enough that most people are not seeing the problem – they are labeling it “small”, so it must be true.
The long-winded point here here? Two things:
1) Government should not be handing out money to anyone who doesn’t qualify for it, which they’ve done for over a year now, but only to big business, big government and big banks. And yet at the same time, most true small businesses who ARE credit worthy cannot “get a dime” when they should. The millions of businesses that are outraged are those that aren’t getting money when they should and are watching the government continue to give it away to businesses and individuals who shouldn’t get it (billions to GM, free mortgage relief for irresponsible borrowers, free money for a new car, etc.).
2) Government continues to hold these photo ops and claim they are helping the little guy. I do not want, nor does any responsible business owner want unwarranted help. But we also don’t want politicians constantly claiming they are helping when credit worthy businesses can’t even get a loan. It is hypocrisy and deceptive communications at the highest level.
I don’t want their money. I just want two things: 1) stop giving big companies an unjust advantage and 2) stop pretending your doing the same thing for true small businesses when they can’t even get a justified loan.
By they way Anita, I believe your view that $35k is a paltry sum belies an attitude toward small business that is out of touch. I could find you dozens of businesses in my town alone who would find $35k to be a perfect bridge out of the recession and everything they need to push them to the next level, hire another employee, etc. (If you’d like, I can send you a number of real live examples where $35k would do this for companies I know). $35k would be a great help to 80% of the busiesses in the US and you call that “paltry”.
You may want to rethink your own view of what a small business is.
Actually Chuck, the stats I cited come from the NFIB report and I stand behind them. They cover precisely the group you call “true” small businesses (I don’t buy into your definition as being “true”, but for sake of argument I’ll accept it here). If you visit the link to the Economic Trends report — a statistically valid survey — you will see that the vast majority of those surveyed had fewer than 20 employees. See page 19 of that report.
Regarding a paltry $35K — let me tell you why it’s a paltry amount. It’s not because I have some disregard for small businesses — and I think it’s unfair of you to make a personal attack based on that remark. I say it’s paltry because:
(1) Many small businesses could raise that amount from credit cards. I run a small business out of my home, with far fewer than 20 employees, and I could raise $35K from credit cards if I needed to. I’m merely saying that in the overall scheme of things, $35K doesn’t go as far as it used to for most businesses. If you have a business with 10 – 20 employees, for instance, that won’t even cover your payroll for one month!
(2) The businesses that need ARC loans are businesses in trouble. If you’re in trouble, $35K really doesn’t go far. And it certainly doesn’t go very far if it takes you months to get the loan, because your expenses, interest, late fees, etc. just keep adding up month after month, and it becomes harder and harder to catch up. Once you get behind it’s very tough to get ahead because everything keeps piling up. I don’t know how they came up with that figure, but it’s not rooted in today’s economic reality, in my opinion.
My use of the word “paltry” is more a reflection of how out of touch lawmakers are, and not a disparagement of small businesses. Because I run a small business — and $35K is a lot of money to me.
Small businesses are suffering tremendously, even with the promise of banks to give out more loans, it won’t help the small small businesses. There is always the option of obtaining a business cash advance. For a business cash advance you don’t need a high credit score, and you can use the cash for anything you want to in your business, as opposed to small business loans which restrict you, on how to spend that money.
Thank you for that great info. One thing that I have not heard, and I asked this question of Matt Shay over at the IFA is this;
“All this talk about small business lending, and not one word about funding start-ups.(local franchises)Are start-ups being mentioned?”
I don’t see it. Anywhere.
The Franchise King
That’s another category of true small business that is being lost in these discussions of 7′ tall supposedly “small” businesses. Start ups aren’t anywhere on the radar. They are best funded right now by angel investors or personal capital, because banks aren’t touching them with a ten foot pole (unless they are secured to the hilt by an extremely attractive, stable portfolio, and in those cases the owner is in a sense self-funding.)
One other example of how banks and politicians are pretending to support small business –
The only SBA/government loan in the last 12 months targeted at true small businesses is the ARC loan. While giving $787 billion to big business, big banks and big government in a matter of days last February, the ARC loan was funded with $255 million – 1/100th of one percent of the $787 billion dedicated to 80% of the nation’s businesses and 55% of the GDP.
That ridiculously small crumb is still not more than 55% committed to loans that were supposed to provide “immediate relief” for “distressed but viable” businesses (Karen Mills – SBA).
Four weeks ago Olympia Snowe, self-proclaimed small business advocate quietly submitted legislation to immediately kill the ARC loan program and pull the measly $120 million remaining back into the Treasury asap.
The banks already have this funding vehicle to help small businesses and they’re not using it. The politicians are jumping up and down about all the things things they are doing to help distressed but viable businesses, and in the midst of all the rhetoric, the real story is that banks aren’t loaning to small businesses and the government is trying to kill the only small business crumb that managed to fall off the big business table.
Where is the reporting on this story? I managed to get one in NYTimes.com and another in CNNMoney.com and a few other places, but most career journalists are silent on this. We’re repeating what the banks and the politicians TELL us, but we’re not doing investigative journalism to find out what they are actually DOING. Parroting what they tell us is not journalism.
Martin, TARP stands for Troubled Asset Relief Program, which was instituted in 2008. The Federal government purchased assets (and equity) from banks and other financial institutions so they wouldn’t go under.
Joel, you’re right, there’s not much talk about funding for new franchises. In the past the SBA was very franchise-friendly, so it will be interesting to see what happens.
Chuck, Even in the best of times, most startups weren’t getting funded–over 70 percent of new businesses are self-funded, or funded by family and friends.
The real problem with the President’s request to the banks to increase lending to small business is that the big banks have never been a friend to small business. They do become a little more eager to provide a checking account once you get established, but for a startup, they could multiply their lending by 1000 and still give us nothing (0x1000=0).
I canvassed the banks in our area in 2005, before the big crisis, and none of the big banks, including Chase and Bank of America, had “a product for us.” We needed a commercial mortgage, had a business plan, and 20% down. I was running out of banks to contact when, finally, the 3rd community bank that I visited was interested and eager to help.
They made the connection with the local progress development office, and, with their guidance, we successfully navigated the cumbersome SBA 504 loan process. Understanding that this was the only opportunity for financing, if the 504 process could be streamlined and expanded, how many more of us could be up and operating? We’ve been open since June 2006 and are strong.
As to business size, we are definitely not one of the 7′ tall variety that previous comments have lamented. We’re probably more like 4′ tall in this analogy. We are on Main St in a village with a population of 700. We employ 7 people full time and pay health care benefits in full for our employees.
The SBA and community banks are a much more viable financing option to help small business to get us out of this recession, but the SBA really does need to reform their process. That would be a huge help, far greater than any appeal to any bank with no interest in those of us less than 7′ tall.
I’m with you – most very small biz’s are funded by 401ks, families, friends, fools and credit cards. But how does that relate to the fact that those businesses who aren’t doing it that way can’t get a loan today that they could have gotten and did get two years ago, with the same high credit worthiness? And how does that excuse the government throwing billions at big businesses/banks/states with no credit worthiness while credit worthy small businesses can’t get a loan? Just because some small businesses use private money doesn’t justify requiring that all do or die.
Many would argue the NFIB report is a non-representative group of small biz owners. From the head of the NIFB: “Our traditional members are Main Street storefront, mom-and-pop businesses. While the number of small firms continues to grow, there are not as many Main Street businesses.” Reported membership is down from 600,000 in 2005 to 350,000 today (out of 27+ million small businesses.)
NFIB is full of stable, highly established long-term small businesses in suburban and rural areas. Ann Meyer, Chicago Tribune says that one problem with the NFIB survey you cite is that it is skewed toward non-urban regions and businesses that don’t represent places like Chicago. And as Dane Stangler, Growthology says, “the interests of a five-employee startup will [not] coincide with the interests of a five-employee, 25-year-old company”.
New and young companies and those in urban areas are suffering much more than established NFIB members in rural areas. Not surprisingly, over 1/3 of all ARC loans have been given out in just three sparsely populated midwest states. Most businesses with years of maturity behind them will have a much lower risk of struggling in a down turn than newer younger companies of the same size. In my opinion, the survey does not account for this reality.
But even the survey you cite tells a different story when you look at the whole report. You said “ten percent reported trouble getting desired financing — a higher percentage than in the past several years — but credit is still being extended”.
Yet this report shows that in 2004 that same statistic was 3% – meaning that it’s now 333% harder for even the NFIB’s well-established and stable businesses to get a loan than five years ago. Imagine how much harder it is for the majority of non-NFIB businesses who are newer and younger and at much higher risk in a downturn.
My apologies if my concern over your use of the word paltry was perceived as personal – I don’t ever want to leave that impression. I was challenging your point of view, which from your response I would still say is at least quite different than mine.
If a small business can raise $35k on a credit card today, they are going to do it at 15-35% interest, an untenable and usurious solution for any size business.
I couldn’t agree more with you that in 10-20 employee businesses $35k won’t go far at all. But in a 2-10 person business it could be a big help. Why dismiss 1-10 person businesses, which are still well over 50% of all businesses in America? I know one $350k/yr business that went under because she funded her supplies for each monthly project from a $30k business credit line that disappeared for no reason (credit at 762). A $35k ARC loan would have been the perfect bridge. She couldn’t get one and lost her business.
I agree the $35k is too small for most businesses above 2-10 employees, but I think it is dismissive to not fight for the millions of business owners (the majority) who still could have found it extremely helpful, and in some cases the key to saving their business or pushing it forward.
In short, I disagree that credit is still flowing, unless you are talking only about the very small percentage of highly established long-term businesses with decades of relationships with an suburban or rural bank. The evidence on the ground and in the trenches with small business owners simply doesn’t support a “credit is flowing” position.
Here’s some small business lending info from FoxBusiness.com:
FOXBusiness.com asked the nation’s largest banks how much each lent to small business in 2009 as of mid December. Here are the results of the investigation.
Bank of America (BAC), in the first nine months of the year, said it facilitated $12 billion in credit to small businesses. The bank said it saw $2.5 billion in loan losses, including defaults, during the same time period. BofA is also working with small businesses to modify repayment plans: since September the company has modified loans to 49,000 clients.
JPMorgan Chase (JPM) said so far this year it lent $6 billion to companies with sales of less than $20 million. The company also said it plans to increase small business lending in 2010 by 67% to $10 billion and to hire an additional 325 bankers for the initiative.
PNC Financial Services (PNC) said it originated $900 million in small-business loans in the third quarter, adding to the $9 billion the company had lent through September.
Wells Fargo (WFC) said it was on track to loan small businesses $13 billion in 2009. The company also this year increased its workforce of bankers on the small-business front by 5% to 31,500, and an additional 2%, or 700 bankers, will come on board in 2010.
Capital One (COF) and US Bancorp (USB) both declined to comment on how much money either lent to small businesses in 2009.
Great stats – thanks. I think I’ve figured out I’m just looking at all this from a different place than you and Anita. Both of you keep going back to macro statistics and I keep looking at it from the micro/local perspective, on the ground, in the trenches with real businesses vs. statistical reports.
The macro stats above appear to say that banks are clearly lending more to “small” businesses. All but one of those banks does not define “small”, so it is reasonable to conclude they are using the standard SBA terminology. If true, then the only reasonable interpretation of these macro statistics is “the above banks are lending more money to people under 7′ tall. But it’s possible/probable that all of that lending is to people between 6′ and 7′ tall and no truly small businesses are getting any of it. No one knows, but the anecdotal evidence is heavily skewed in that direction.
JP Morgan is the only bank that defined what they meant – businesses under $20 million. Even the SBA’s “7 feet tall” definition doesn’t include $20 million companies. The SBA uses “7.0 million for most retail and service industries” and “$14.0 million for all special trade contractors”.
89.3% of all businesses in America have 19 or less employees and 50% of all businesses have just one employee. The macro report can say all day that banks are lending to small businesses but on the ground and in the trenches there is the clearest evidence that most businesses under 10 employees and a majority of those up to 20 are not getting the financing they used to be able to get, and it’s a problem of historic proportions.
Here’s more real, on the ground statistical evidence that the macro stats aren’t telling the story. Wells Fargo is one of the banks quoted above as beefing up their “small” business staff by 5%. But in Colorado since June Wells Farge has received thousands of applications for the ARC loan (they won’t say exactly, just “thousands”) and have only given out 31 (as of November 15).
Either 99.99% of all applicants are not credit worthy or credit has become absurdly hard to get for businesses that used to have no problem getting it.
Again, the biggest issue isn’t that the banks and government aren’t lending to small business. The biggest issue is that they continue to pretend to (via macro stats like those above) and are using small business to promote their own self-centered re-election and public relations agendas.
The worst form of support is patronization. If the politicians and the banks would just stop claiming they are helping us, we would stop pushing back and figure this out on our own as we always have.
The stats from FoxBusiness would more directly support a discussion about whether financing has increased or decreased if they were year-to-year. Just because they are talking in really big numbers, millions and billions, that does not demonstrate an increase. They are macro stats and we need to drill down to really understand what those numbers mean. Only then can it be determined whether the banks are doing better at small business lending (or not).
Let’s look at the PNC stat as an example. Not only do they not report on the previous year, but they also profess a cut within the current year if we take the time to digest the numbers. They lent $9 billion through September, the end of the third quarter. They originated $900 million in the third quarter. Aren’t they reporting to us that they cut lending? If lending had been steady over the 3 quarters, wouldn’t that $900 million originated in the third quarter have to be $3 billion?
These figures do not support the statement that banks are doing better. I hope that they intend to do better, but the proof will be in the pudding, in going forward. Looking back confirms less lending, but plenty of room for improvement! It will be interesting to see if their vow will restore lending simply to what it was, or if there will be real growth in partnering with small business. Year-to-year data (over several years) will be essential to draw a conclusion.
Please also keep in mind that the big banks are not interested in start ups. This report would have meant more if lending to startups had been broken out as well. A breakdown by business size would have been great to see – maybe $1 million & $10 million total sales as breakpoints, rather than just lumping all businesses under $20 million in the same group.
There is another interesting, related article on FoxBusiness.com. “PayNet reported that delinquencies among small and medium-sized business rose in August.”…”PayNet said its small business lending index, which had risen in June and July, fell at an annual rate of 20% in August.” That sure doesn’t sound like doing better at small business lending to me. It demonstrates how much they’ve cut back. Again I want a follow up stat though. How many of these delinquencies followed an unanticipated interest rate increase? In many cases, I think the reason that businesses (and personal loans as well!) are falling behind is just that – that suddenly, without warning, rates have gone through the roof – a death sentence imposed by the very same bankers that we are supposed to believe want to help us.
To your point on unanticipated interest rates and why credit cards are the worst possible non-answer for a truly small business right now – I know one business owner who had $27,000 on business credit cards all under 5% that all went to 24-32% all in the space of 2 months. Her payments became untenable – she went under.
I had heard banks were lurking with rates hikes intentionally at the worst possible moment and wanted to test that gossip. I had a 6.9% card with Wells Fargo with zero balance and put $6,500 on it to see what would happen. Two weeks later we received a notification that rate was going from 6.9% to 13.9%. Coincidence? Of course not. Horrible business practice? Nothing but. Will I tell this story the rest of my life? Yes, Wells Fargo will pay for it for decades to come as I tour the world with keynote addresses about “bad profit.”
I paid off the card the next month, but the rumor is true – banks are waiting until business owners have big bucks on the card and then yanking the rug out from under them. Card holders beware – credit cards are not a solution to your borrowing problems.
We recently lost use of a mastercard because Citibank discontinued that product. Our business account was closed. They gave us a month’s notice, maybe 2. We had a $15,000 credit limit. I used it for monthly expenses and paid the balance in full each month, an average of about $3000 each month. We’d maintained the account that way for about 3 years.
This is just another method that the big banks have used to cut business lending, and it is another stat that is missing from the conversation. I’ll bet you they aren’t even including credit cards in the stats about small business lending. All of the same big banks have them. Such cuts in the product line could account for millions & billions in lending cuts also.
My company provides a prepaid/debit card solution designed specifically for small businesses that need to manage employee expenditures.
We launched the service in 2008, just as the crash was taking shape. It took until February or March 2009 for the effects of banks’ actions to cut credit to have any material effect on the SMBs we talked with – exactly like what Carol describes happened to her Citi card. For businesses that like the electronic papertrail a card service has but can no longer make any use of a credit card account for daily ops, those businesses were actively searching for something new, so we’ve talked to a lot of businesses in 2009.
At this stage in the game, the lending discussion is not going to focus on the ability to borrow through credit cards and it is likely to stay that way for some time. Banks view credit cards as a path to high profits (Chuck’s “bad profits” that is) but have been forced to balance that with their own ability to manage risk. An open line of credit on a card can be run up very quickly and if there is a good chance of default – its not worth the risk.
So from our perspective, cash management is the focus for SMB owners on a day to day basis (the majority of our customers are businesses with <50 employees) and financing projects and equipment through debt is handled with a loan or other type of credit line if they can get one.
The last few stories are showing the real borrowing situation and the real heart and intent of the banks toward the 70+% of all businesses with under 10 employees. A picture is worth a thousand “vows”. At the same time the banks and politicians are making more empty promises to prop up their own images, they are sneaking in legislation to kill the only loan programmed designed for businesses under 10 employees and sending credit card rates to historic highs while the feds interest rate is at historic lows.
The only responsible way to view the “vows” in this article is in the light of the last year of destructive political and big bank action that continues through today. Actions speak much louder than words.
Stop vowing, bowing, snorting, pawing the ground, pontificating, and holding press conferences to get the media to parrot your empty promises. Just loan out the rest of the ARC money to companies like Carol’s and drop the usurious credit card rates so they can be a solution as Anita suggests. And restore credit to deserving “distressed but viable” small business owners.
Until then keep your vows to yourself. Stop talking and just do the right thing. We’re no longer fooled by your future promises and we won’t stand still to be your photo op anymore.
I’m absolutely certain that there are other people like us – with a business plan and 20% down – who cannot make the necessary connection to get the startup funding that they need. It was too hard to find in 2005. I can’t imagine how remote the odds are of find funding now. These people are an untapped resource that really could drive the recovery. One wish for the upcoming new year is that their potential will be tapped.
Another wish is that the real data behind the banks and their small business lending will be revealed. Those who control the money have the power. We’re just pawns in their shell game if we don’t look deeper at the numbers and hold them accountable. What did small business lending look like in 2008, including credit cards? How much did that change in 2009? How will the changes in 2010 compare to 2008, not just the low of 2009?
Some stats are available online. I was pleasantly surprised to find that SBA’s Office of Advocacy does compile data and publish extensive reports. Unfortunately, the most current reports were for 2008 data. By the time they report on 2009, the data that would be instrumental today in demanding accountability from the big banks for their recent business decisions will be history.
This link is to a very interesting compilation of reports from 2006-2007 data…
Most applicable to this conversation was the noted growth in the small business credit card market by larger financial institutions. The data also reports that small business lending under $100,000 by the big guys was in the form of credit cards, not loans.
Big banks made an executive decision to expand the small business credit card market. Apparently they’ve changed their mind and made the executive decision to pull out without regard for the consequences to their customers. They pulled the rug out from under small business in the form of cancellations and rate increases, just like they did when they made the executive decision to write subprime mortgages, then let those teaser rates expire without refinancing those loans to the detriment of all.
Not that link, this link takes you to the SBA Office of Advocacy report…
Small business lending contracted in 2009, we all know that. The most telling piece of evidence is how banks adjusted their small business credit card portfolios. Most major issuers either cut business’ card lines or canceled accounts all together. In Q2 Amex shed 2 million accounts as stated in their quarterly earnings report – however, it does not break down numbers of consumer / business accounts. Advanta went out of business and most business card issuers have stopped marketing to SMBs.
In many cases small business owners use personal cards in their businesses. In 2006-2008 banks were trying to find avenues of growth for their card portfolios. With only about 2% annual growth in their consumer card portfolios, small businesses seemed like the next viable option for 10%+ growth. Think of how saturated consumer card businesses were – banks were trading customers back and forth like cell phone carriers.
Banks would look at the spend profiles and if a consumer seemed characteristic of a business, they’d offer a new business account. New business owners could get $100K credit card line from B of A with little more than a good personal FICO score. Today banks are requiring full reviews of financial detail, etc. just to get started…even then you’ll wind up with a low line of credit.
One thing is certain, its going to be some time before credit card companies revert back to their old ways. That’s why I started a prepaid, debit card for small businesses – no credit is offered, just a card system for controlling and tracking employee expense expenditures.
Great digging on credit cards. The stats and reports always lag beyond reality. And pandemic issues are never isolated. Credit card usury is only one symptom of the much wider borrowing problems that true small business is suffering under.
This is why it’s so important to push back hard on such nonsense claims as the banks have made it in this article. They say they are increasing lending in 2010. This claim is much the same as “enrichsed white bread” which removes 30 nutrients in the bleaching process, puts back 10 and calls it “enriched”. The banks are hoping we won’t notice.
I’ve read many of the responses here and find them all to be quite to the point. The reality is that small business and medium businesses are on their own … the US Gov’t isn’t going to help them, nor is it going to force a bank to do anything it doesn’t want to do. The answer is actually pretty simple … think in the alternative. There are other places to get money and the one I have found to be infinitely more accessible and agreeable is factoring of receivables, inventory, purchase orders and production orders. Look around, there’s lots of factoring companies with extremely competitive rates and they’ll finance up to 90% of the asset, not just 50% or less. And they don’t make you sign away everything you own, your future and make you do hundreds of pages of documents to get the money. And, oh yeah, you can the money fast – three to four days, not three to four weeks (or months!). Consider that factors collect the money for you, you don’t have to pay for an accts receivable dept staff, get you cash when you need it (right freaking now!!) and cost about the same or less than getting less money from a damn bank! It’s not for everyone, but it certainly fits many business models better than a slow-moving, negative-thinking, unreliable bank.
One last statement, before I await the responses. What no one seems to be seeing or sensing is that banks, big and small, are positioning their customers for making them (the bank) more money. How does a drug dealer get his customer to pay more for the drugs? He withholds them until the customer screams for them and when he offers them up again, he raises the price. This is EXACTLY what the banks are doing. They’re withholding so they can get a better deal and be perceived by the government and the media as stepping in to do the right thing. I hate to say it, considering how intelligent everyone submitting input here is, but we’re all suckers if we play their game! You can reach me on Twitter … name is RPRitter. I’ve been a small business management consultant for 28 years … I’ve been in the trenches, on the ground and up to my neck in real small business all across America.
So Patrick, what would you suggest? Banks need to make money, they’re businesses too. How do we strike the balance–more money for small businesses, smart (and fair) lending practices?
Banks are businesses too and they do need to make money. That is not to be disputed. And we do need some ideas that allow banks to do business without putting us out of business.
One potential solution is increased partnering between the banks and the SBA. The SBA loans are funding options to be employed when the banks feel there is too much risk for them to shoulder alone. The risk is then shared with the government. If the application & closing processes were improved, more could be served. More businesses would get loans, banks would write more loans while limiting their risk. 504 SBA loans have a proven return on investment. Everybody wins. Currently the paperwork is too labor intensive, and the time required to process is too long. SBA needs to throw it out and start over. Then banks would find it profitable to do business with SBA & we’d all win.
A significant other solution needs to come from within the banks. It is just an absolutely stupid, self-defeating practice to increase interest rates such that they increase the number of defaults. How could it ever be a good business decision to increase those monthly payments as they have in both subprime mortgage lending and more recently in small business credit card lending, in a months notice and by significant amounts? Suddenly they have MORE customers, not less, who can’t pay them! How does that make them hit their numbers? Instead of contented little customers that were chugging along making those monthly payments,a reliable steady income, they’ve got us mad as hell, struggling or in default! They end up with less money coming in, and more money going out in the form of attorney/collections fees to add to their expenses.
Jacking the rates like they do to the detriment of their customers is a really bad business decision. The consumers end up paying the price for that decision and it’s affecting us on a personal level. That does inflame our responses and bring in emotions that are hot. We’re angry because we feel like none of this was within our control. It would be really helpful going forward if the banks would spend less time on spin and more time working really hard to regain our trust. One good way would be in the form of tighter agreements that would not allow for the kind of increases they’ve smacked us with. And if they won’t do it, the government should.
I forgot one more very important way that banks can improve their ability to make money without negatively impacting their customers. Bonuses should be linked to performance. Period. It is also a poor business decision to enter into agreements with staff that require payment of ridiculously large sums of money in the form of bonuses when the business is struggling financially.
Again if they can’t do that themselves, the government should force it upon them. There would be no concerns over the competitiveness of the salary package or that they can’t fill the positions with the best candidates because they would all be on the same playing field. The bailout of TARP co-existing, simultaneously with these bonuses was the greatest insult to the American public.
To respond to Rieva’s question of how to strike a fair balance between the banks making profit and their customers being able to do business with them I think we first need to look at the simplest and most basic concerns each has. Yes, banks must also make a profit to stay in business, but as we all know, it is easy to make excessive profits and then reduce them with excessive salaries, advertising campaigns, investments and other line-item expenses to mold the profit picture into one which you want your shareholders and regulators to view. Granted, excessive salaries are not as easily disguised, but they still exist, persist and resist shrinkage to reasonable ratios. Additionally, when banks have extra profits they spend them in acquisitions, expansions, remodels and other upgrades which then go to benefit the shareholders, all the while disguising the true bottom line. This is a good-news, bad-news scenario. I find banks and business in conflict with each other at almost every turn. If we look outside our own borders, we see banks and government and business working hand-in-hand to secure and solidify business to ensure a better economic product. Japan is a prime example, as are other Asian and some European countries. But in America, it is every man for himself and the banks subscribe to this theory just as much as any other business entity. And let us not forget our own financial history beginning with the creation of the National Bank, the reasons for its demise under Andrew Jackson and the creation of the Federal Reserve. If business wants money, it still gets it, in one form or another, from this controlling entity. This promotes a rather myopic view of business from the standpoint of the banker. Having worked with many independent investors for many years (28+) I can say with confidence that an investor is more interested in placing funds into a $5 million deal than a $500k deal because each takes the same amount of time to consider, analyze and effect, but the $5 million deal has probably got more stability, more assets, better people and a greater return behind it than the $500k venture. Banks look at things the same way. If they had their way, they would leave “small” business off the balance sheet and go after only the big-money deals. It takes less time, there’s less risk (in ratio), there are more assets (generally) and it takes fewer people to monitor and manage.
With all that said, it means that banks are never (and please understand that I do not like to use the word “never”) going to find much interest (no pun intended) in doing business with truly small businesses. I believe that the solution lies in community and government charters as they exist for non-profit ventures where communities and municipalities co-op with businesses to employ, produce taxes and provide economic stability to their local economy. Banks, as a part of their charter, should be required to provide capital to small business centers which in turn provide capital to worthy enterprises in appropriate amounts and with appropriate oversight. This means the bank is going to make less money on that portion of their portfolio, but the trade is that they can make the big dollar loans they want to make and definitely make up the difference (and then some) from the companies they wish to support. I’m not a communist. I’m a raging capitalist, but I believe that if you don’t nurture and grow new companies, the old ones will become stagnant and intractable, resulting in a field dominated by only a few players. Let us never forget the examples of Bill Gates and Michael Dell.
So my short answer, with long explanation, is that banks must become partners of the economies in which they exist. They must not punish their customers for their own profit and they must respond to the genesis efforts of all entrepreneurs because as our history has shown, it is from these humble beginnings that financial giants are grown. To do otherwise is folly.
Banks are not the only answer, they’re just the answer we’re used to hearing. Banks hate competition and have demonstrated their unhappiness with the burgeoning presence of credit unions, check advance businesses and others who creep into their realm. It’s time to take off the gloves and get down to some real business competition. Remove the shackles of those who wish to enter the ring and make the playing field even, regardless of the weight-class. The last funding of ineptitude, called “Tarp” was the antithesis of Andrew Jackson’s desire and intent. He said, “Capitalists tend to favor themselves, at the expense of the common man, when it comes to matters of financial well-being”. The US Gov’t played right into the hands of those whose performances should have been punished, not rewarded. Understanding the international implications, financial implications here in America and down on Main Street is fundamental to the recovery of a national economy. When businesses get “too big to fail” then we’ve bastardized capitalism and replaced it with socialism in its purest form – government-run anything. The last two years have done nothing but reinforce the inescapable reality that banks, and their ilk, are monuments which will not be assailed … even to the detriment of the people who allow them to exist. This lesson alone foments the need for change and the environment for re-assessing and re-directing the processes which brought us all to this end.
Banks can be and should be only one component of a field of available financial services for small and medium businesses. They should not be the only institution in the discussion.
I think we need some simplicity in the conversation.
[Edited to remove personal comments]… glaringly obvious symbiotic relationship between big business, big banks, and big government, and their ongoing PR campaign to take our attention off that by pretending they are all helping small businesses.
We don’t want handouts to small business. The problem is that banks, big businesses, unions, and politicians are all passing handouts around between themselves, all to the detriment of small business. Then they have the audacity to talk about small business as if they actually care, and trot us out for photo ops like aborigines in a missionary photo. It’s disgraceful and close to obscene.
We’re okay with not getting the help. What we’re not okay with is them pretending we’re getting help while they’re all passing money back and forth to our detriment. If you give loans to a 50 person business that allows them to grow aggressively and you don’t do that for a 10 person business, where do you think the 50 person business finds their new customers? They come from the 10 person business who can’t get the resources to stay relevant.
[edited by Editor to remove personal comments]
Today, the bankers are seated in front of a Congressional committee, apologizing for taking excessively high salaries and bonuses while Rome burned. Who can blame them? That’s all they know how to do. Apologizing makes everything right. Keep the money, don’t worry about what you did to millions of people, their retirements, their businesses, their lives. Because you said you’re sorry, everything is back to even. Does anyone else think there’s something wrong with this picture? I’m reminded of the old swindle we used to try when we were children … the one where we give the other kid one penny and take one. Then we give the other kid another penny and say “Two for you” and we take two more and say “Two for me”. Then we give the other kid another penny and say “Three for you” and we take three pennies and say “And three for me”. That’s the mentality of pretty-much every banker, especially at the top. I think the time for political-correctness and pleasant countenance are way past. This is about money. They want it. They all want it. They don’t give two hoots about anyone else but themselves. Just like the rest of us. They may couch their words in obligatory terms of deference and social nuance, but it is always about the money – their money. It’s not about how much good they can do for their customers or their responsibility to repair the economic carnage they’ve wrought. It’s about their damn money. And judging by the fact they make poor decisions, lose unfathomable amounts of money on risky deals, plunge a nation into depression and create unimaginable anguish and suffering among innocent people and their families – they still expect and demand to be paid! If I screw up, I pay for it. If you screw up, you pay for it. If they screw up, they get paid back, in full, with interest, keep their jobs, get bonuses and keep going. What has America come to? When is right, right and wrong, wrong? An apology is a slap in the face to the people who have genuinely suffered. It is an affront to common sense, moral decency and personal integrity. Take away their money and then see what happens. I’ll bet they grovel. I’ll bet they beg. I’ll bet they scream out in anguish and discover the fear of not knowing how to put food on a table, bread in their child’s mouth or pay the rent on their mansion. If all I had to do to keep my job, hold onto my bonus and have my company bailed out by American taxpayers was apologize, I’d fight my way to the front of the line and do it. These “men” make me sick to my stomach. They are not “men”, they are cowards of worst kind. They should be jailed for their failure to execute their fiduciary responsibility to their stockholders. Anyone else who does what they’ve done would be put on trial for that very reason. They would be stripped of their ability to oversee other people’s money, forever. An apology would not even begin to resolve the mountains of difficulties they had placed themselves in. But yet, there they are, apologizing … and laughing, all the way to the bank.
US Small Business Optimism Deteriorates Further, US News & World Reports – http://bit.ly/6mWZD4
Fox News – 8% of small businesses plan to hire in 2010, 15% plan to lay more people off.
We’ll see how it all pans out. It’s still going to be hard, and harder than usual, for businesses to secure traditional loans in 2010. They plan to loan more money this year…but to who? To the businesses who really need it? That’s to be seen.
A business cash advance is an excellent alternative to businesses who don’t quality for a traditional loan (or need one faster and with less red tape) and for businesses who ‘can’ secure a traditional loan (MANY of these qualified businesses are turning to this option more and more because of the flexibility). It’s cash given up front to businesses when they need it. Depending on how much monthly revenue the business brings in, they don’t have to make monthly payments like with small business loans; instead small debits are automatically taken from batched credit card sales which makes repaying the money much easier.
Another resource is a Merchant Bank advance on credit card purchases … if you do a lot of business with credit cards and your Merchant Bank, you can get an advance from the Merchant bank against future credit card purchases. Every little bit counts in today’s world and you never know, it just might get you across the bridge in front of you.
I have been a small business consultant for over 30 years. I’ve worked with a number of small businesses in Utah, but I’ve also worked with companies all over the United States, Asia and Europe as well. I understand what it takes to make a small business successful and how to grow it without losing everything. The President’s State of the Union says he wants to put more money into small businesses by funding regional banks. Frankly, we’ve all seen what happens when money flows into banks, it generally stays there and relatively little flows out. I’ve been speaking with a number of small business owners and we all agree that it would be better to place these funds into an associative holding that is headed by owners and managers from small businesses to distribute, rather than have banks be the deciding factor. Let’s face it, banks don’t really understand what it’s like to run a small business. Their programs and qualification processes are “one size fits all” approaches to what serves their needs, not their customer’s needs. If associations of restaurants, auto body shops, dry cleaners, painting contractors, landscapers and others were organized to distribute the funds to needy companies that they judge as worthy, the whole program would have significantly more value and the inclusion of the associations would give the government the kind of “one-on-one” relationship it needs to make this type of program really work. I would enjoy an opportunity to discuss this matter with you or your staff to see if a program can be initiated that puts these funds to work for the people who really pay the taxes, not an intermediary which can’t relate to the small business environment very well. Thank you for your time and attention to this most important matter.
Small businesses should really find other ways to get a loan aside from banks. Better yet, develop a business model that’s geared towards sustainability and avoiding too much debt. A debt is still money owed no matter how you look at it.