Posts Tagged ‘Business Loans’

Anonymous Banker weighs in on SBA and the Economic Recovery Act: Rhetoric or Redemption – Time will tell

Friday, April 10th, 2009

Is the new SBA lending program simply more bailout for banks or truly designed to help the stuggling small business owner? 

 

Well, really, who cares?  With all the billions being poured into the financial companies and auto industry, any plan that helps the small business owner is a good plan, in my book. 

 

I see three components in the Economic Recovery Act that should help revive lending to our nation’s small business community.  That is, IF the banks actually cooperate and finally start to meet their fundamental role of making loans.

 

The first program will make available $15 Billion dollars in SBA 7(a) loans and 504 loans backed by guarantees  to the banks of up to 90% .  Borrowers will not have to pay SBA lending fees which provides a meaningful cost savings in their quest to obtain working capital.  It is under this program that our Community Banks have an opportunity to shine and to show our Congressional leaders the vital role they play in supporting the business communities they serve.

 

The government originally rolled out the TALF program, designed to jump-start the securitization markets for Credit Card, Auto, Student….. and yes, tagged onto the end, Small Business Loans.  In an effort to increase credit availability and support economic activity, the Federal Reserve Bank of New York  agreed to lend money, on a non-recourse basis, to investors who purchase Asset Backed Securities from banks. Thusfar, regardless of the guarantees, the TALF program has not increased Small Business lending initiatives by the banks.  The reasons are obvious:  First, in this economic environment the investors don’t want even the small risk associated with SBA lending.  And secondly, because the confidence in these asset backed securities  has been completely eroded, no one really wants to buy them.  And finally, our leaders have not required the banks to start lending, but merely to file reports that will reflect how little they are doing.

 

So with TALF doomed to failure, at least as far as Small Business Lending is concerned, our leaders have gone back to the drawing board to sweeten the pot.

 

It’s TALF with a twist.  While this $15 Billion program provides the originating bank with a 90% guarantee, the government realized that they would not be able to budge the banks unless the banks had assurances that they could divest themselves of these loans after they made them.  With that in mind, our Treasury Department announced that it “will be a ready buyer of the loans in the secondary market.”  

 

And this is where the community banks and perhaps credit unions will play a vital role in getting these funds into the hands of the small business owner.  These banks will originate the SBA loans and sell them, ONE AT A TIME, to the broker/dealer.  The broker/dealer will gather these loans together, from the originating banks,  and sell them….. directly  to the government.

 

Since the announcement of this program, there’s been a big to-do about whether the broker-dealers will participate or whether the Federal Plan to Aid Small Businesses is Flawed.  It seems that since the $15 Billion dollars, used to fund this program, is coming from TARP funds, the broker-dealers that act as the intermediary between the originating banks and the Treasury may be subjecting themselves to TARP restrictions such as limits on Executive Compensation. 

 

Personally, I don’t believe that President Obama, our Congressional leaders or the folks in the Treasury Department intended this interpretation.  Perhaps the simplest way of looking at this is to see these broker-dealers as ‘contracted intermediaries’ by the Treasury Department.  The Treasury cannot be expected to purchase one loan at a time from the banks across our nation.  In order for the program to work, they must have a broker-dealer facilitate the purchasing, packaging and subsequent resale of these loans to the Treasury.  There you have it – and I am sure over the next few days, and with the encouragement of the SBA’s new Administrator, Karen Gordon Mills, this situation will be resolved to everyone’s satisfaction.  Perhaps this is an opportunity for Treasury to create a working partnership with a broker-dealer that didn’t put up barriers to the success of this plan.   

 

This is a plan that will work.   It’s smaller than I would have liked, but it should bring a sense of renewed confidence to our Small Business Community.  New money, new loans, community bank lending, and an opportunity to revitalize our economy one business at a time, create and save jobs and send a clear message that the small business owner’s significant contribution to our economic recovery is recognized and supported.

 

ARC Stabilization Loan

The second program, which has not been rolled out by the SBA yet – but coming soon, is the ARC Stabilization Loan (America’s Recovery Capital).   These loans are to be originated by pre-approved bank lenders (yes many of those same banks that have refused to make business loans over the last several months but had no trouble taking billions in bailout funds from the government).   The loans will be backed 100% by the SBA and will have a maximum loan size of thirty-five thousand dollars. 

 

The $255 million dollars in ARC funding translates into a significantly higher loan volume because it represents the guarantee and the interest subsidy provided by the program.  Borrowers will not have to start repayment for twelve months and full repayment is expected within five years.  Since the SBA will  subsidize the interest on these loans,  the ARC program will provide relief to the business owners as our nation makes its way through the beginnings of our economic recovery. 

 

Once again, I’m counting on Ms. Mills to move this program along to where it needs to be.  I’ve had several conversations with local SBA District Offices and would have liked to see the terms of this program more clearly defined.  The big question is this:  Will ARC merely provide “six months worth of interest payments on existing loans” to the small business owner?  Because if that is the case, then the vast majority of these loans will be for extremely small amounts that banks will be uninterested in processing and ultimately will not make very much difference for the small business owner. 

 

These first two programs, to be truly meaningful, should allow the banks to refinance some of the smaller working capital credit lines that are, today, being systematically pulled by the banks?  I understand that Chase, for example, recently froze working capital credit lines for tens of thousands of their business clients, the vast majority of these lines being under $100,000.  And they are not alone in this process.  I’m told that it is Chase’s intention to give these customers an opportunity to present updated financial information and to reinstate the credit lines for those businesses found to be credit worthy under the bank’s new credit criteria.  Refinancing these credit lines under newly created SBA loans funded by the ARC program or what I lovingly call the ‘TALF with a twist” program, would be an excellent alternative to leaving the viable small business owner without any form of credit.  Additionally, and under the right circumstances, one effective use of these funds would be to refinance credit card debt accumulated by our small business owners, many of whom are now subject to the interest rate increases upwards of 20% recently implemented by the banks.  Most of these borrowers would significantly benefit from the relief provided by SBA lines and particularly those that provide interest rate relief.   

 

Make no mistake about it.  The ARC program, if used as I describe above, would most certainly be, yet another, bailout for the banking industry.   But let’s put that aside for the moment.  My concern today is for the Small Business Community who is, once again being slammed by our financial industry leaders when they most need our help.  Let us hope that these programs will allow the small business owner to refinance their existing debt, significantly reduce their monthly payments and gain the temporary relief to their cash flow needed to weather this economic storm.  We need to help them keep their workers employed, pay their rent and remain in business. 

 

Don’t be fooled.  This is not a bailout program for the business that is out-of-business but hasn’t come to terms with that finality.  The ARC program states that the business has to be ‘viable’ and what that means is yet to be determined.  Borrowers should expect to provide financial information regarding sales/revenue and income.  So for those small business owners that over-extended through the business liar-loans,  businesses that ‘stated income’ that they now cannot support with tax returns:  I don’t think you will qualify.  And if you are one of the small business owners that like to make money, but don’t want to pay taxes:   You won’t qualify either.  If you can’t make it on your own, then the banks will be writing off your debt and taking the loss.  Shame on the banks and shame on you.  

 

I’d like to add one final observation.  When a bank cancels a business credit line, they do this without warning.  The line is simply frozen and no additional draws are allowed.  A letter is sent to the business owner requesting updated financial information, AFTER the credit line is revoked.   In a frenzy, the business owner faxes in their financials to a nameless, faceless person who evaluates their condition.  In my experience, I have seen the following reasons provided in the bank’s refusal to reinstate the lines of credit:  (a)  Decrease in revenue and/or profit (b) weaknesses in cash flow  (c)  debt to income too high. 

 

Well, no s_ _ t, Sherlock!   We ARE in a recession, and I dare not use the “D” word here.  Our country, and the world, is in the grips of an economic tsunami that the banks caused. This situation is rooted in the financial industries endless quest for greater profits and the absence of any safe and sound lending practices, further compounded by our Regulators refusal to halt the industry’s despicable practices over the last ten years.

 

We are now caught between a rock and a hard place.  These loans are the hardest to underwrite.  The smaller businesses that will benefit from ARC funds and from refinancing debt under the ‘TALF with a twist’ funds,  simply don’t have anything for the banks to wrap their greedy little arms around.  And it will be difficult to determine which company truly has a chance of weathering the storm and which, despite any refinance of debt, will be forced to close its doors.  Furthermore, simply terming out working capital lines will not provide the relief needed.  We need to slash their interest rates, continue the lines as revolving credit so that it can be used and re-used over the next three years, and then, after a time, term it out.  SBA already has the product matching this description.  Now the SBA has to give the banks specific criteria so they are comfortable  with the conversion.  There can’t be any second guessing or Monday morning quarterbacking on this process.  If President Obama, our Congressional leaders and our Regulators are truly committed to helping the small business owners across this great nation, then DO IT.  Jump in with both feet.  Yes, there will be losses.  But there will also be jobs saved and tax revenues generated and an increase in confidence so critical to our recovery.    

 

The third program, which is already in effect, is the expansion of the existing Micro-loan program.  These loans are granted by special non-profit community-based lenders  throughout the country (microlenders), and not typically by banks.  It provides for fifty million in new loans.  But don’t count on any special rates.  SBA website reports that micro-loan interest rates range from 8% to 13% , which is still better than the usurious rates many banks have started to apply to business credit cards and small revolving lines of credit.  Most microloans are directed at the very small and struggling business and yet, these are the loans that come with application fees in the $500 range.  I am unmoved by this program and so far, disappointed in the channels that are supposed to get these funds into the hands of the small business owner. 

 

For those business owners still interested in applying for a micro-loan, finding a lender might prove difficult.  You can start by visiting this website: http://www.sba.gov/localresources/district/az/index.html and selecting your local SBA office from the dropdown box.

 

Congratulations to Arizona, Los Angeles, San Diego and Santa Ana California,   Jacksonville Florida, Boston Mass, Nebraska, New Hampshire, NY-New York,  Oregon, Rhode Island, South Dakota, Houston-Texas, Utah, Virginia, Seattle-Washington and West Virginia.  If I left any out, I apologize.  But COME ON – SBA site developers.  The folks out here need help and only 17 of the 71 offices appear to provide any information on current SBA lenders and/or Microlenders in your area. 

 

And to our New York District Office, our thanks for your prompt reporting of loan volume in your area and the names of the banks that have continued to support our Small Business Community during these last five months.  Your site reports that for the SBA fiscal year which ended September 30, 2008 there was an AVERAGE of 290  7(a) loans made each month and over $33Million in 7 (a) loans made within your district each month.  However, from October 1, 2008 through February 28, 2009, in this same district, only an AVERAGE of 70  7(a) loans were made each month and only an average of about $14.5 Million in 7(a) loans were issued.  These figures support that over the last five months, SBA  7(a) loans decreased in number by 75% and in dollars of loans granted by 56%. 

 

SBA should require that every district office post up-to-date SBA lending results.  It’s important for the business owners in our country to understand which banks are supporting the needs of the small business community and the economic recovery of this nation, and which banks have snubbed their noses at our leaders’ endless pleas to apply the bailout funds to meaningful lending programs.   The New York District Report indicates that  JP Morgan Chase, who accepted $25 Billion in TARP funds,  dropped from the number one SBA lender to number  9, having made a total of 40 SBA loans totaling just over $2.8 Million.  Bank of America, who received $45 Billion in TARP funds, moved from the #2 spot to number 33.  BofA’s support of the small business owner was represented by 12 SBA loans totaling $410,000.  And Citbank, who previously held the number 5 ranking,  made a total of 3 SBA loans totaling  just over $1 million dollars.  This nation provided Citibank with $50 Billion dollars.  I leave it to the reader to draw their own conclusions from these numbers.

 

To America’s small business owners and to each and every individual, I offer the following advice:  Stop complaining and DO something.  Go establish a banking relationship with one of your local community banks and reward them with your bank accounts.  If possible, pick one of the banks on the top of the SBA participation list. Check out their bank rating here:  http://www.bankrate.com/rates/safe-sound/bank-ratings-search.aspx?t=cb. Find the best bank in your area and encourage all your friends and business associates to move their accounts.  Yes, it will be inconvenient to make a move.  But if we, the people, act together in unison, we can send a clear message to the financial industry that we will not stand by and let them tear of life out of this country with their greed and avarice, and then reward them by banking with them.  We will not do business with them, when they have failed us, and continue to fail us,  so miserably. 

 

And to President Obama and our Congressional leaders:  We thank you for your efforts and we look forward to a prompt and effective resolution to the release and implementation of your new SBA Recovery Plan.  Please hurry!!!

 

 

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Anonymous Banker: Why are Working Capital Lines Disappearing?

Friday, March 13th, 2009

President Obama has put together the Financial Stability Plan, which states: “This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.”

 

President Obama, Congressional Leaders, Regulators: 

The business community of America needs your help.  You must change your focus and consider implementing lending policies and procedures that will allow businesses to remain open, allow them to continue paying their rent, paying their employees, and  paying their loans.

 

Put aside the liar loans that were granted over the last ten years to business owners that overstated their revenue and income. Those are NOT the loans I am speaking about here.  Our regulators allowed banks to violate every prudent test for safety and soundness in bank lending over the last decade.  And now that you let the proverbial horse run out of the barn, you are empowering the banks to slam the door on all the businesses that are, or may still be, credit worthy.  Your actions will directly contribute to the severity of the depression that is coming upon us so quickly. 

 

It has been stated to me, by senior credit officers in one of the largest US banks, that  40% of RENEWAL REQUESTS for business working capital lines of credit are being declined, termed out and/or called by the bank.   The loans I’m addressing in this article  are to the smaller to mid-market companies that have not missed any payments, have met all commitments as agreed and still have a chance of surviving.  These are the businesses that support the economic future of the communities across our nation.

 

These working capital lines are the lifeblood of any business.  They provide the companies with capital that they need to purchase inventory, finance production of goods, carry receivables, and during these cycles, to pay their employees and their rent or mortgages.  It is NOT term financing.  And this is a very important point.  So I will repeat it:  IT IS NOT TERM FINANCING.

 

Working capital lines are repaid by the conversion of one asset into cash in a short period of time.  It is revolving credit.  A company uses the funds to manufacture goods.  They then sell the goods and convert inventory into receivables.  Then they wait and they convert the receivables back into cash.   The difference between their cost and what they sell it for, is the profit.  From that profit, they pay salaries, rent, etc.    They do not repay working capital lines from PROFIT.  Businesses  repay working capital lines from CONVERSION of assets into cash.  Then they begin the cycle all over again.

 

A term loan, conversely, IS repaid from profits.  If a company buys a piece of equipment, they should not use their working capital to buy it outright.  They should finance it over a period of time that is typically determined by the useful life of the equipment they are buying.  A computer for example would be financed for two years, a die press machine for seven or ten years, and a building for twenty years.  These loans are paid for by profit over a specified period of time.

 

There are a number of things that go into the evaluation of a request for a working capital line to a small business owner.  We look for diversification of receivables and timely collection of receivables by our borrower.  We look at turnover of inventory as related to the type of inventory they carry. We evaluate repayment history and the company’s capital position.  Banks want  companies to retain capital and not distribute all their profits to the owners.  We look to see if they can pay the revolving line down during the course of a year.  We look at secondary sources of repayment through personal financial statements:  cash, investments and equity in the business owners’ homes.  (Thanks to the banking industries bad behavior, all business owners have less to offer the bank by way of secondary sources of repayment!)  We also look at the personal credit scores of the owners.  Gross sales and revenue trends also carry significant weight.

 

I’m not here to give our leaders a lesson on bank lending.  But perhaps it would be wise if you at least understood the principals that should be applied to lending.  You need to understand this in order to understand what is happening that is going to kill this country.

 

Regulators are now requiring the banks to evaluate existing and new working capital line requests in the following way:    First pass, we look at all the typical things we looked at before as defined above.  But now, Regulators are adding another pass by requiring banks to determine what would happen if the customer could not pay back their working capital line through normal asset conversion.  Regulators are requiring the banks to evaluate if these same customers can repay the debt, at the time the line is made or renewed, from profits over a three to five year period. 

 

This is determined through a ratio called ‘debt service coverage’.  A business that can and does repay working capital lines from the conversion of assets, oftentimes cannot pass the debt service coverage evaluation criteria.  A $250,000 working capital loan cannot always be repaid if it is converted to a five year term loan, particularly in a declining revenue and profit environment.  Using this as a standard for evaluation means that most companies no longer qualify for their working capital lines and our Regulators are giving the banks a perfect excuse to cancel the lines of credit and demand payment.

 

Each and every day, in my work as a business banker, I am addressing this issue.  These are not customers that are late on their payments, delinquent in any way, or not meeting their obligation.  These are customers who, without a credit line will be OUT OF BUSINESS.  Their workers will be unemployed and their commercial real estate left vacant.   

 

Is this your vision of Economic Recovery?    I don’t think it is.  I just think that you are so focused on the big picture that you are not seeing what is actually happening in the real world today. 

 

 

This must not be allowed to happen.  Right now there are only two categories of loans on the books of the banks. The good loans and the bad loans.  There are test standards that determine where each  loans fits.  Today, there must be a third category for loans that are being paid and that support those companies that have exhibited every ability to pay.  These companies still have a fighting chance.  Directly addressing the small business owners’ needs will bring a much needed level of confidence to the people of this country.

 

Give the bank lenders the ability to do our job.  Let us document a file and explain why, in spite of a company not passing the “debt service ratio” the banker still believes that the working capital request represents a viable deal.  And make our regulators live with that decision until we are proven wrong and the loan starts to actually show real signs of default in the form of slow or late payments.  The bank can always classify the loan at a later time and it will be in no worse position than it is now.  I recently challenged one such decision, and I was told by a Senior Lender in my bank that they perceived a deterioration in the credit based on the “debt service coverage” and it would be better to grab any money we can now while the getting is good!  This is the philosophy that the banks are using while they spew their deceitful claims that “they are still making loans”. 

 

In the rare cases where the lines are being renewed,  the banks are increasing  the interest rates across the board.  Banks are enjoying a historically low cost of funds.  They borrow  through the Fed at zero to ¼% and they pay their depositors between zero and 1%.  Yet businesses  that were previously being charged Prime + 1% or Prime + 2% are now having their rates increased to Prime + 6% to Prime + 11%.  The banks are clobbering the business owner with higher rates at the very time that these businesses need to be cut a break.  I propose that they are doing this to offset all their losses on the liar business loans they made over the last ten years that have no chance of being repaid.  And you, our leaders, are doing nothing to stop them.

 

I beg our leaders to see the truth in what I am saying.  I know that I am only one person, but perhaps Congress should call various bank lenders into a closed session and have them testify about what is REALLY happening in the industry.  And I don’t mean the CEO’s of the banks and the Senior Risk officers.  I mean the seasoned,  mid-level lenders.  We certainly could tell you a lot, if you would just give us an opportunity to communicate with you.  You will not believe how bad it is out here. 

 

I urge you all to focus on the details and on implementing effective lending policies and programs that will keep our businesses open and our citizens employed.  Irving Fisher, one of America’s reputed economists, outlined the factors that contributed to the length and severity of the Great Depression.  Fisher saw it as a chain of events that started with debt liquidation and distress selling, the contraction of the money supply as bank loans were paid off and a deterioration of confidence.  Will you allow the banks to create the scenario where history will repeat itself?   Or will you ensure that when history unfolds and our future generations look back at this period of time, that they can say that YOU had the strength of character to make the tough decisions that brought us quickly out of this crisis?  We are all depending on it.

 

Readers:  Please, take a moment to send YOUR story to President Obama, the Senate and House Banking Committees and your Congressional Leaders. 

 

http://change.gov/page/s/yourstory

http://banking.senate.gov/public/index.cfm?FuseAction=Contact.ContactForm

http://financialservices.house.gov/contact.html

http://www.senate.gov/general/contact_information/senators_cfm.cfm

https://writerep.house.gov/writerep/welcome.shtml

 

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