The Credit Spigot is still not flowing fast enough to grow opportunity. We need to turn the business credit spigot back on by the beginning of the fourth quarter 2012
The key to small business survival continues to be access to credit. The well-being and growth of small businesses depends on how depository lending institutions (commercial banks, savings banks, and savings and loan associations) are meeting the needs of small firms. Knowing which lenders provide small business financing helps small firms save valuable time in shopping efficiently for credit. Such information also helps lending institutions learn about the demand for and supply of small business credit, about the competition in the markets they serve, and about new investment opportunities.
According to data collected by the Fed, lending to small businesses actually fell by 46% in 2010. Business lending overall fell by 8%. How do we expect to recover as an economy when even the lenders refuse to lend?
SBA lending. Quiz when a bank agrees to give a business person an SBA loan, what percentage of default risk do you believe the bank is taking? In other words, if the borrower defaults and goes under, what percentage of the debt will the bank have to absorb?
The answer? The borrower is of course responsible for 100% of the default risk. The bank is responsible for 90% of the default risk. Under very favorable terms to the banks from 2009-2011, the federal government is responsible for 90% of the default risk (the banks risk of borrower default) as well. The lender is responsible for only 10% of the default risk, however, they already have the borrowers original 10% down-payment. Therefore, the lender actually has the lowest amount of risk in the entire transaction. Even with this level of risk-containment, lending is shrinking. Outrageous!
How then can banks be proud of the fact that SBA lending has actually shrunken over the last 12 months? I say proud because if you read the news, lenders are bragging every day about their lending programs. If you did not know better, you might be fooled into thinking they lending is actually getting out to the businesses that actually need it. I can tell you from direct experience .. lending is not getting out.
According to Source: Federal Deposit Insurance Corporation, Statistics on Depository Institutions, June 2005 through June 2010 and Bureau of Economic Analysis; SBA lending fell from $652 billion to $601 billion. This means there were $51 billion fewer dollars circulated into the economy by the very financial institutions all businesses rely on for credit to expand their operations. How can we power economic growth when the lenders cut lending to all businesses by 8% in 2010 alone? Especially when those lenders participate in a government insurance lending program that basically eliminates the lending risk for the banks?
It is hard enough to have a business in the first place. Businesses need access to credit to manage their cyclical capital peaks and valleys. Credit is especially needed when a business attempts to grow – especially if demand is the growth driver. Imagine how frustrating it was last year for a business to have demand which would create more revenue and profit but be told by the lenders they would not extend them credit – even though the lenders were almost completely shielded from significant downside risk?
We need to turn the credit spigot back on – full throttle. America has a demand that needs to be satisfied. American businesses are ready to invest in improving their industrial-throughput and the quality of their products or services. American businesses are poised to invest in morphing higher levels of customer service and service outcomes. In some cases the investment is in the form of equipment, technology, new talent, real estate, sustainable implementation or rebranding. The point is businesses are ready to invest in themselves.
Recent Fed action acknowledges economic opportunity is out there but it needs to be unleashed. Now is the perfect time to move the needle and get the credit opportunities into the hands of the small and medium businesses.
Instead of making it easier to access credit, far too many lenders have adopted policies designed to stifle the entrepreneur. Of course it makes sense to lend to stable and suitable businesses, however when the lack of lending actually destabilizes an otherwise stable business, someone needs to look at the lending policies. The Fed action is proof that it takes more than one willing entity to successfully magnify business opportunity and the lenders have been largely absent from the equation.
Therefore, I challenge all lending institutions and investors to leave their comfortable offices and come out to the field ( not the street or the market) come out into communities and neighborhoods where the average Joe and Josie live to see first-hand what the lack of significant lending and investment in small businesses and neighborhoods is really doing to the small business persons American Dream. You would be as ashamed of yourselves as I am.
The real challenge I issue to lenders would be to answer this question: What will my lending institution do to reverse the trend of shrinking lending to small businesses and neighborhoods by October 2012? Then I would say: talk is cheap, “show me (us) the money”. Give us your plan.
No business is asking for a bailout or a handout. We just need access to credit. We will work hard and will never ask for a favor. We will produce outstanding products and services and we will grow market share and customer demand. We will continue to take the most risk. We will pay back the lenders with interest and the entire economy will benefit.
Where are the institutions that are willing to take me up on my small business credit challenge? The country is awaiting your response and your next action.
We must get the small business credit spigot flowing anew!