Solving the Small Business Credit Mess

The U.S. federal government said the Great Recession was over in June 2009. Unfortunately, it’s at least year three and counting of a very difficult economic climate for many people . It’s not just the protesters at Occupy Wall Street or in your local community; it’s every darn small business owner. Why are they so mad?

protest concept

For small business owners, large commercial banks got them into this mess and now they are preventing them from getting out. Bankers have become as respectable as used car salesmen. Large commercial banks that practiced unprofitable lending policies that were deemed “too big to fail” where bailed out by the federal government through the “Troubled Assets Relief Program.” While most of TARP’s $245 billion that it invested in banks has been repaid, the banks aren’t doing much with the profit. Absolutely, positively nothing.

Robert Eyler, professor of economics at Sonoma State University in Rohnert Park, Calif., provides a shocking insight into the current state of banking. Before the 2008 recession, he states that banks had about $2 billion in assets that they had not lent out. Today, they have $1.5 trillion on hand!

“We Are Lending!” is a popular sign in front of many banks these days. It invites the small business owners to apply for a loan even though their chances of getting one is very low. What is worse, banks tease small businesses by advertising low interest rates on loans. When I inquired at my local bank about who can qualify, the reply was, “Not many!” I now need to explain to my teenage sons that banks used to lend money, not just charge fees to keep your cash or give out coffee, cookies and trinkets on Saturdays. (When my son asked me why there was a guard at the bank, I told him that it was to make sure no one asked for a loan.)

Paradoxically, now entrepreneurs need to prove they don’t need a loan in order to get that loan. This is reminiscent of a joke that says banks will give you an umbrella when it’s not raining, but take it away when it starts to storm. Without credit, it becomes very difficult for most small business owners to expand their companies, and that is exactly what the economy needs. Large commercial banks should be ashamed of how little of their available funds has been lent out since 2009.

At the same time that banks are stockpiling cash, their fees are increasing on almost everything. Public opinion recently thwarted Bank of America from charging fees for using its debit card. However, the average bank has 49 different fees, ranging from $1.50 to $175. Among them are fees for:

• Overdraft protection
• Using an ATM machine
• Receiving or sending a wire transfer
• Making copies of statements or checks
• Replacing a debit card
• Not having enough transactions monthly
• Not depositing money in a given month
• Closing the account too quickly
• Making online transfers to other banks

This has prompted a response by small business owners to move their accounts to community banks and credit unions. In fact, November 5, 2011, was proclaimed National Bank Transfer Day, which encouraged 40,000 people to move $80 million to less-costly credit unions. In fact, the Credit Union National Association reported that from September 29 to November 5 650,000 people joined credit unions, more than in all of 2010. Not surprisingly, in the retail banking sector, more customers are choosing Wal-Mart’s financial services over those of banks.

The blame is not all on the bank executives. In an overzealous effort by the federal government to ensure that another politically-charged banking failure does not happen, the FDIC imposed very strict lending rules. It makes it much more difficult for the banks to lend money, even as political leaders publicly push those same banks to do more with the SBA. New laws require the FDIC to establish minimum leverage capital requirements and minimum risk-based capital requirements for all banks.

Banks also make payments to the FDIC’s Deposit Insurance Fund based on total domestic assets minus the tangible equity of the bank. The FDIC determines new ratios of insurance premiums to assets, where banks with higher safety ratings get lower ratios. In other words, if you lend less, you pay less. In fact, the largest banks with $50 billion in assets are also now required to show the FDIC how they would break up and sell off their assets if they were in danger of failing.

Small business owners can no longer wait for the pendulum to swing back to the lending side of the ledger. The FDIC must take action to allow and instruct banks to make loans for small business. They should establish a fund for small business from the $20 billion profit that the federal government made from TARP. This “Small Business Relief Fund” would more than double the loans that are currently available through the SBA.

If small business is indeed the key to a broad economic recovery, the FDIC, the SBA and the federal government need to pay more than lip service to it. Stable and rich banks are still a failure to the economy and to every small business owner who participates in it.

What do you think the solution is to the small business credit mess? What path should be taken?

Protest Photo via Shutterstock


Barry Moltz Barry Moltz gets small business owners unstuck. With decades of entrepreneurial ventures as well as consulting with countless other entrepreneurs, he has discovered the formula to get business owners marching forward. His newest book, BAM! shows how in a social media world, customer service is the new marketing.

32 Reactions
  1. I’m glad to see more lending go to community banks and credit unions. I feel like the entire banking system has become de-personalized. Part of the problem is the ease of bankruptcy which allows people to bail on their commitment to repay debts. This causes banks to be extra cautious about lending and it spirals downward from there. People need to be more responsible financially and then be rewarded by community banks and credit unions with better loans and rates. Big multinational banks aren’t going to solve this problem.

  2. I agree- community banks can help by getting more personal with customers and understanding who they are lending to!

  3. These guys are so far out of touch with the real world (in this case small business) that they don’t even know what small means. Big banks have never been lenders to small business.

  4. As a small business owner (gas station), I absolutely LOVE this post. The same sentiments having running through my brain for years now, and it is really refreshing to see something like this in print. I’ve felt the pain for the last fours years, and your “umbrella” statement really hits home. The banks will lend you all the money you DON’T need, but not the money you DO.

    I think it’s time for the small business community to start thinking outside the box for other lending options like crowdfunding, credit unions, community banks, etc., and let the big banks sit and play with their cash until they choke on it.

    • Agreed, I am not sure when Bank lending will every come back like it was in the early part of the last decade. Small business owners need to plan without it!

  5. I certainly agree with the sentiment of the post. However, let’s not forget that banks make a huge share of their profits off loaning money, not hoarding it. Also, let’s not forget that we entered this mess because banks made bad bets. Their reticence to make more bad bets is somewhat commendable. Alternatively, small business loans may sometimes be risky bets, but they are often smaller in amounts. I think the answer now is to find a calculation that government and banks can agree upon to fuel the operations of our economy. This is not an easy task to be sure, but the reaction or overreaction of government has choked credit.

  6. Correct, the balance is key

  7. Barry,
    I love most of what you have to say and I think this is great. I’m assuming that you’re not proposing that the banks go back to the poor underwriting standards that caused the problems we’ve experienced the last few years. And while I agree that I want to see the banks do more lending there is hard evidence – recently from Chase & Citi mainly – that the big bank lending to small businesses has increased (from very low levels I agree). I like the idea of a lending fund for small business but I’m not sure how much the FDIC can “force” banks to lend so perhaps the “incentive” would help. However, if the bad underwriting got us here…then lending slowed down dramatically…so the Fed created TARP to stop the banks from completely shutting down their lending…and now a couple years later the lending is slowly starting to happen again…aren’t we headed in the right direction at least? Again, I agree that I want it to happen faster but have we at least begun the process of coming back from the “bottom?”

    Great article!

  8. Its all a matter of degree. The FDIC puts such a premium on banks security these days (they all need to have a living will) that it makes it hard to lend…we need a happy medium!

  9. Thanks Tom! any more suggestions on how to increase bank lending?

    • That’s a loaded question but the answer is simple. Lending today has become complex. Would you represent yourself in a lawsuit? Some do but most choose to hire a lawyer who has been trained to deal with the complex issues involved in the legal system. So my answer is that small biz owners need to recognize that these are not the 70’s and 80’s and the nuances of credit and lending are complex. We need to adopt a thought process that understands that because one or two banks said no that doesn’t mean that they all will say no and then what about “preparing” for a loan so that I’m dressed up for the big dance (the loan submission to the RIGHT lender). Then there’s the thousands of non-bank lenders that can offer the short-terms solution (at a higher cost yes) while the small business credit and lending consultant helps me create my long-term solution that gets me back to the bankable options.
      You asked for it Barry…lol. We need more small business owners working with small business lending consultants who can provide these kinds of solutions.

  10. The financial institutions that lent the money get all the blame. How about the speculators and investors who took out the mortgage loans in the hope of making a “killing” ? They need to share some of the pain and blame as well.

  11. Most people don’t do the math. They have opinions, but don’t run the numbers. When the government (rightly) tells banks to double their Capital to Loans ratio, simple math says their loans are going to halve. And why not, with so much government debt out there as an alternative investment? This is the de leveraging process, formerly called the business cycle. It is the time for well founded firms to increase market share.

  12. Recently I went to my bank and offerred to put $10,000 in a CD against a $25,000 loan, Guess what the answer was….NO we don’t do that! It’s truly amazing.

  13. I am not surprised. It was too creative!

  14. I had this conversation with a Key Bank Executive this week. I have totally financed my business, training etc and there is no help at all because I am not two years old, and I don’t want a government loan, the government is broke. So I continue to find a way by myself which is ok, no one owes us anything, but when I really get where I want to be they will have their hands out for tax money. bleh

  15. Banks are rediculous when it comes to getting a loan or line of credit increase. My small business gross is 1 to 6 million per year and I have one 25K line of credit and my bank wants credit info and 20 forms filled out.before they would even consider it.


    • That’s definitely crazy but keep in mind that each lender is different. Some banks need financials for every deal no matter how small whereas others do not. Some need collateral for every deal whereas others do not. The right lender – and not just any bank – may be able to do what you need if you’re a qualifier whereas the wrong bank will paperwork you to death and then still say no at the end.

    • I feel your pain…I took out a mortgage for a new home and they wanted to see actual checks from clients to prove income!

  16. Although the focus has been on big banks not lending, the real hurt is because community banks are under such pressure to improve ratios. Small and regional banks have been the prime targets of regulators to make sure that they are “safe” with large reserves and no risk loans. I understand why the FDIC does this, but the impossible challenge is to improve ratios and lend money at the same time. It is simply not possible to improve ratios and makes loans at the same time.

    When the Federal regulators start to focus on larger banks and require the same kind of standards that they are holding community banks too, then we will see a real hue and cry.

    The Gramm-Leach-Bliley Act has led us to a place where big banks can still take investment bank type risks. Wake up FDIC, we need some commercial bank/investment bank separation of risks. Glass-Steagal was enacted because of this very problem. It’s time to learn our history or we will repeat it.

    Bank regulations are part of the solution. But right now they are also a big part of the problem.

  17. I wish it was a simple problem with a simple solution. It seems that all of the government efforts to force, encourage, tempt lending were simply wasted because of all the new regulations imposed on the lenders. If ours truly is a free enterprise system, then what we really need is government to get less involved.
    I work with small business clients every day.
    Business owners are less inclined to borrow right now because they’re still uncertain about the overall economy. Banks are similarly nervous. However, I see signs that lending will improve this year for existing businesses. I would argue that patience is what we really need right now.

  18. I only hope you are right.

  19. Some good comments about banks and credit. But what about a regulation that forbids large companies from standardizing on Net45 and 60 day payments and holding small businesses hostage to become THEIR bank. For the privilege of doing business with “Mr Big Fortune 500 Company” I get to lend them my money for 45 to 60+ days! They get to save millions or billions on the backs of small business owners.

  20. The banks didn’t make bad bets: they did exactly as the federal government told them to do through various regulations and incentives. Then the market crashed, so the government bailed them out. As sick as it makes me, this seems to make sense to me; the government got them into the mess so it should get them out. Now the government lends them money at 25 basis points, which they use to buy T-bills at 3.75% for a risk free 3.5% profit. The problem is and always has been the government. Banks are simply agents responding to rational market forces. If the government would stop lending to the banks (except in rare circumstances), then banks would start lending again.