Bank, Schmank: New Rules of Small Business Finance
Posted by David Rhoads on Wed, Jun 16, 2010 @ 11:38 AM
Part 1 Where's the Bank Credit?
Why the only businesses getting loans right now are the ones who don't need them.
The point of all that TARP money funneled to banks beginning in late 2008 was to end the credit crunch. And in recent months at least three of the country's biggest lenders have announced ambitious plans to ramp up lending to small businesses this year. Yet, a year-and-a-half after the bailout, as the economy finally seems to be lurching into some sort of recovery, some untold number of America’s millions of small companies are still trying to get their hands on the capital they need.
So are banks back in business … or not?
Big banks promised to make more small business loans but haven't.
Photo credit: Flickr/TheTruthAbout...
Although Wells Fargo, Bank of America and JPMorgan Chase pledged to make significantly more loans this year, it may be easier said than done. Bank of America, for example, lent $3.4 billion to small businesses in the first quarter of 2010, which is actually down from the $3.9 billion extended during the same period last year.
Part of that decline may be attributed to demand, which at Bank of America has only started to pick up in the last few months, according to spokesman Jefferson George. “When businesses are struggling, they’re not necessarily looking to extend themselves further,” he says.
But what about those who do? “There is ample credit availability right now,” says loan consultant Ed Freiermuth. “For any business that’s qualified. What’s a ‘qualifiedbusiness’? That’s the meat of it.”
Now's the Time to Get Creative
Banks have been given money to shore up their balance sheets and reserves, but even while they’ve been pressured to lend, they’ve also been warned not to make bad loans.
“Regulators are looking over their shoulders saying, ‘Fine, lend money, but if you screw up, you’re going to be in trouble,'” explains Freiermuth. In his experience, underwriters are being much more exacting in their evaluations, and the effect is a contraction of lending parameters. From his perspective, it’s a throwback to “old school” banking, in which bankers gather reams of data and go strictly by the numbers to winnow down applicants to those that have little probability of going south.
From the bank’s perspective, according to Bank of America's spokesman, it’s not so much that the criteria has changed, but the fact that what borrowers bring to the table doesn’t hold up like it once did — cash reserves might be depleted, collateral may have lost value.
However you look at it, the upshot is largely the same. “In essence, the only people who can get credit are small businesses that don’t need it,” says small-business advisor Chuck Blakeman. “Profitable for the last two years, perfect financial shape? No problem.”
Anyone falling outside those bounds is going to have to embrace an economy with new, tougher rules — and become just as creative about finding credit as they were about their entrepreneurial vision in the first place.
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Eric Hagerman is a New York-based freelance writer and editor and former senior editor at Popular Science and Outside magazines.