We’ve been hearing about increased confidence in small business and, if you’re like me, you want to believe it – but you’re suspicious, too. How do we really know if things are getting better? How do we really know if lending is beginning to open up for small businesses? I don’t think anyone is claiming that small business loans are becoming easy to obtain, but there are good signs that we are headed in the right direction and that the availability of funds are growing for main street.
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
Even slow progress is welcome progress. Thanks for the update and I agree that the Occupy folks (for the most part) weren’t focused on the right things.
The more, the better. After enduring the last few years, even a modest uptick would keep more small businesses going and keep the economy puttering along.
Thanks for passing along the news, Tom.
Tom Gazaway
lol Hi Dave – it sounds like you’ve been “enduring” the small biz lending challenges of the last few years. Thanks for the comment and I hope I can share more “tangible” good news about increased lending again soon!
Thanks a lot, Tom.
Great to finally meet you in NYC, too!
3 years ago, a financial expert told me that one Cleveland bank would fail. (It did.)
He also told me that the amount of , “Bad paper” that the banks have on their books is huge-which is why they won’t lend.
Is he correct?
The Franchise King®
lylacavanaugh
Things are getting worse. Most small business don’t want to borrow because they have almost no customers. Three restaurants closed down in the Marina del Rey last week. The place my husband eats breakfast everyday . . . well he is on many mornings the only customer. He lost his business himself several years ago, forced into early retirement from lack of customers and increasing overhead. This lack of customers and increasing overhead is happening across the board. Tonight I went to a Whole Foods market that is usually chock full of customers and I could not believe how many people weren’t there that used to be there. No customers equals no business. This slow deterioration began years ago and is becoming worse, not better. Look around.
Tom Gazaway
Thanks for your comments. I agree that there’s definitely some areas that are harder hit than others. I also think restaurants are a tough indicator since there’s such a high failure rate for restaurants even in better economic times.
The signs I’m encouraged by are that unemployment rates are improving steadily, consumer spending is better than it was in 2009/2010, and big bank lenders are starting to do more lending. Hopefully some of that additional funding to small businesses will be used to go out and attract new clients and customers.
We’re definitely not out of the woods yet but there’s several indicators of improved conditions nationally even though some pockets have been hit harder than others.
Lending is slowly picking up, but a lot of businesses are in trouble because of low sales. A lot of personal guarantees are being asked for.
Lending comes and goes…It’s all cyclical. Right now banks are overleveraged and want some cash. There will always be some kind of debt restructuring. The banks had a good run for a while but right now they are desperate for some cash and that is where we come in. We help people lower their debt, whether on a commercial property or jumbo loans.
It’s good to be able to breathe again and not be suffocated with so much debt.
Mark Brundage
Global Financial Corporation