Why aren't banks lending to small business?
"It's easier to lend AT&T a killion dollars to buy T-Mobile, than to make a million small-business loans," says Multifunding Corp.'s Ami Kassar
Why aren't banks lending to small business?
Joseph N. DiStefano
Bank bosses - Jim Rohr at PNC, Mark Turner at WSFS, to name a couple of recent examples - tell me they want to lend more to small businesses, but they can't find good borrowers - since most solvent business operators are too scared of business conditions to want to take on more debt. "I don't buy the theory there's not a lot of demand for small business loans. There's plenty of demand," responds Ami Kassar, the ex-Advanta Corp. manager who runs small-business loan advisor Multifunding Corp., up in Broad Axe, Montgomery County, which, he says, is on track to close "over 50 loans, with (total) balances over $30 million, in 23 states," up from 4 loans for $3 million the year before.
Multifunding and its staff of 5 screens and matches business clients with banks and other lenders, for loans under $1 million, and takes payment both from borrowers and from lenders. The shortage of banks willing to make such loans, at market interest rates around 4% to 8%, has driven many borrowers to "factoring, accounts receivable financing, hedge funds, and asset-based loans" typically charging 15% up to 40%, Kassar says. His firm tries to match potentially good credit risks with lower-rate lenders who might not find each other unassisted.
Why is this hard? "The banks want three things: cash flow, collateral, and credit. When they can find all three, they'll fight to do those loans. But there aren't too many small-business borrowers who meet all three criteria. Especially for collateral. Service businesses don't have collateral" since they typically don't own buildings, valuable machines or liquable inventory. So banks are "forced onto this high-interest-rate treatmill. There is plenty of money available - at the higher interest rates."
What about the bankers who say there aren't good borrowers? "This demand spiel is how the bankers love to cover up their lackluster lending. I'd like to see their approval rates" for would-be business borrowers under $1 million. Kassar crunched the numbers to test his theory. Checking US banks' quarterly call reports ("Reports of Condition and Income," view them at www.fdic.gov), he found that, among the banks that control 80% of US deposits, total deposits "have gone up from $5.7 trillion in 2007, to $7.5 trillion this year," but small-business loans by the same group of lenders (which has been consolidating every year) has fallen to $309 billion, from $400 billion four years ago.
Big banks neglect small loans for the same reason real estate salespeople would rather sell one $1 million Medford mansion than 10 $100,000 rowhomes: "it's easier to lend AT&T a killion dollars to buy T-Mobile than to make a million small-business loans," Kassar says.
"But that's what the economy needs to recover."
What, if anything, can the government do to make small-business lending more attractive? "The government just leans on the Small Business Administration," which provides taxpayer guarantees for about one-seventh of US small-business lending. "SBA plays an important role, but it's not the end-all," Kassar adds. "The government ought to encourage bank examiners to look at the ratio of small-business loans" to total bank business.
As an aid to that exercise, Kassar has set up an online search -- www.multifunding.com/banks -- that ranks, for example, PNC as "poor," because its reported small-business loans equal just 5% of its deposits, below the national average, while Philadelphia's tiny Valley Green Bank (which makes far fewer loans of any kind than PNC does) ranks "excellent," because it lends fully one-third the value of its deposits to small businesses.
Is the Fed still paying these banks interest on "excess reserves"? There's your answer.— Wilhelm Von Humboldt- "The banks want three things: cash flow, collateral, and credit. When they can find all three, they'll fight to do those loans"...Wow, this is like the PW Herman show. Well, not being an expert of the Moody's caliber, I would venture a crazy guess that if a company had "cash flow, collateral and credit" (the last being a real key), they may not be that desperate for a loan. Just saying'......— CiceroSpuriousDeodatus
You know, people think they understand the way the world works because they know how their little life works. This is the fallacy of the "kitchen table bill paying theory of economics". Politicians like using this theory, because the public, for the most part, likes buying into it. It goes like this: politician stands in front of cameras, takes a dollar bill from his wallet, and snaps it crisply for affect. He then goes onto say that the government or business for that matter, can't spend more than it takes in, can't go borrowing forever, and of course, that the government with nuclear weapons, drone bombers, trillions of dollars and the legal right to issue the currency of the land, is just like your family sitting around the kitchen table, trying to figure out what to do with all of that extra month at the end of your money. Of course it is ridiculous to try to gain economic insight on a complex and enormous nation state of 320 millions by comparing it to bill paying at the kitchen table. But that is how misdirection is carried out.
Banks are not lending because they can't find good deals. Banks aren't lending the minute they hit their profit numbers for the year. And with the way the Fed subisidizes the banking industry with zero interest rate policies, of course it is easier to take free money by the trillions, in exchange for bad eurobonds, bad mortgage backed securities bad whatever, and take US T Bills paying only 1 or 2%, and make interest free money, rather than take a risk on lending to someone who might not pay back. 100% security with no transaction costs beats lending any day of the week.- A small business doesn't know what its tax obligations will be two months out, thanks to our pig-headed President and a Congress filled with special interests on the take.— Wilhelm Von Humboldt
- Commentary from anyone with an Advanta pedigree should be taken with quite a bit of caution. Commercial banks when dealing with smaller borrowers even those they have known for years rarely did so on an unsecured basis. These banks which underwrite loans, i.e. don't use scorecards, have ALWAYS looked to the cash flow of a company and its cyclical nature, as well as the purpose of a loan and credit history even if it is with vendors as well as other financial institutions.
Loans and the repayment schedules which are for working capital have flexible repayments while capital loans a much longer term commitment must exhibit need and planning and a future business growth and cash flow improvement. Term debt always is a secured loan and more often than not required a personal guaranty of the owner.
Factoring (an industry practice) protects the provider of inventory; asset based lending is a very specialized formula based cash advance process which some banks have; if done right it can be of help to the borrower while minimizing risk. Whether it;s done by a bank or by a third party, the level of risk represented by the borrower and the cost of the monitoring process is reflected in the loan rate.— trpilotjr - Once upon a time lenders were taught the 3 Cs of credit- Character; Capacity- how much debt is on the books and how much more can a co. handle as well as legal issues impairing payment;
Capital/collateral- (your second way out of the loan which you hope you never need), defined as the liquidity, real estate ofr other assets which could be sold to satisfy the debt.
Since fire sales and foreclosures can net as little 50c on the dollar banks require an abundance of it even as it will do whatever it can to have the borrower maintain or liquidate the assets— trpilotjr - The money to lend is typically not at local banks right now since they are battling to get it back at BK Court or selling there portfolio off at discount to Capital or REIT Groups at 30 cents on the dollar so they do not get shut down by the FED. The money to be deployed is in private capital funds and lines that are disbursing based on lower LTV or LTC but it leaves room for all parties to go conventional and also facilitates clients that are really qualifed to have and manage a loan. The complaint is some parties should get loans no matter what and that is exactly what got these banks in trouble in the first place.— josephvscorese
