It’s no secret that small businesses have faced a funding problem during this Recession, and over a five month period ending June 30 the Federal Reserve held 43 meetings to try to understand why. From Lexington, KY, to Detroit, Miami, and Denver, to Shreveport, LA, the Fed has spoken to business owners and other in order to come to some understanding of the situation. The information is in, and on Monday Federal Reserve Chairman Ben Bernanke shared the results during a forum on small business lending. The reason for the drop in lending? Well, they aren’t certain.
A July 13 story in the New York Times’ “Deal Book” reports that the Fed chairman discussed three possible factors: decreasing demand for loans, poor financial condition of small businesses, and less credit available. Bernanke told those attending “No doubt all three factors have played a role.” His plan for turning things around? Telling banks to help small businesses to get the credit they need. Seriously?
Perhaps it’s time for Chairman Bernanke to take a walk out of the Fed’s ivory tower and take a closer look at what is happening. Yes, the Fed spoke to hundreds of business owners at those meetings, but the question remains - how much did they listen? From talking to long-time business owners, new entrepreneurs, and lenders, I have come up with my own list of reasons for the credit situation.
1. Businesses are reluctant to borrow in uncertain economic, tax and regulatory time
First, and possibly most important, small businesses are reluctant to take on additional credit in a climate of uncertainty about the economy, taxes, and government regulations. With the yet to be determined additional levy for Obamacare and new proposed regulations - including cap-and-trade - this is not a time that inspires confidence among business owners.
2. The economy is bad and may be getting worse. That makes it much less likely that businesses will apply for loans
The regulatory and tax issues are on top of the declining economy that has seen most companies lose business as consumers cut spending to try to get by. With these factors, many business owners have decided to forgo plans to expand or to replace equipment until the full impact of everything is clear.
3. Banks are completely hammered by the economy (that is perceived as getting worse) as well, making them fearful of lending in tough times
Banks are also dealing with a number of factors that inhibit lending. We have seen over 200 banks taken over during the past two years, and the remaining ones are more concerned with survival than with growth. This results in the banks circling the wagons, so to speak, to prevent additional losses. If you want to know more about banks and “credit culture,” I have a free report on “Understanding bank 'Credit Cultures' and how bankers think” just for visiting the SBA Loan Store and signing up for a no-obligation email or telephone session to answer your questions. You can also find several Power Reports based on my 35 years of experience in the financial field.
4. Banks have serious deterioration of their capital base, making it impossible to loan to anyone in many cases.
Most of the money banks take in is normally loaned out to individuals and businesses for their use, in exchange for repayment with interest. However many of those individuals and businesses that took out credit have defaulted and the banks are left with empty collateral in the form of houses and buildings they currently cannot sell off. This depletes the bank’s resources, and in some cases they have had such a deterioration of their capital base that they are unable to make any loans at this time.
5. Banks are being told not to make bad loans. That is Fed Speak for 'DONT MAKE LOANS'
And then there is the government watching over them. They are being told not to make “bad” loans - which is government-speak for “don’t lend.” The concern over defaulted loans has pushed the banks to tighten their standards to the point that even many viable companies are unable to get credit.
6. New federal and state regulations are increasing pressure on banks to clean up their portfolios, increase fees, and make reporting more specific and within Federal regulatory requirements
Banks are being told to clean up the problems that previous government directives have created, plus add more fees to help cover the losses they have suffered. The banks are also being given additional reporting requirements - read “additional paperwork” - that they will need someone to handle. If you are having cash flow issues, would you hire more people or create less paperwork? Put it all together and you have strong dis-incentives to lend to small businesses. And now Bernanke is telling the banks to start lending? Which message do you think they are going to pay attention to?
This is not to say that there is no hope for small businesses looking for credit in the current economic situation. But it does mean that having someone who knows what to do and where to go can be an invaluable asset to any business owner looking for funding. An SBA-guaranteed loan is still the best choice for many looking for funding. I am still placing loans for businesses looking to improve or expand and am ready to work with the right companies. Contact me and we can discuss your needs and ways to meet them.
Craig G. Francis is the owner of Francis Financial and The SBA Loan Store. He has been a top producer of SBA Loans since 1981, and has worked with Dun & Bradstreet and Bank of Commerce. Craig Francis has the expertise to steer clients through the often confusing rules and regulations associated with SBA Loans, having helped over 2,000 businesses acquire over a billion dollars in loans. He can be contacted through CraigGFrancis.com, SBALoanStore.com, on LinkedIn, or at 888-666-9722.
A July 13 story in the New York Times’ “Deal Book” reports that the Fed chairman discussed three possible factors: decreasing demand for loans, poor financial condition of small businesses, and less credit available. Bernanke told those attending “No doubt all three factors have played a role.” His plan for turning things around? Telling banks to help small businesses to get the credit they need. Seriously?
Perhaps it’s time for Chairman Bernanke to take a walk out of the Fed’s ivory tower and take a closer look at what is happening. Yes, the Fed spoke to hundreds of business owners at those meetings, but the question remains - how much did they listen? From talking to long-time business owners, new entrepreneurs, and lenders, I have come up with my own list of reasons for the credit situation.
1. Businesses are reluctant to borrow in uncertain economic, tax and regulatory time
First, and possibly most important, small businesses are reluctant to take on additional credit in a climate of uncertainty about the economy, taxes, and government regulations. With the yet to be determined additional levy for Obamacare and new proposed regulations - including cap-and-trade - this is not a time that inspires confidence among business owners.
2. The economy is bad and may be getting worse. That makes it much less likely that businesses will apply for loans
The regulatory and tax issues are on top of the declining economy that has seen most companies lose business as consumers cut spending to try to get by. With these factors, many business owners have decided to forgo plans to expand or to replace equipment until the full impact of everything is clear.
3. Banks are completely hammered by the economy (that is perceived as getting worse) as well, making them fearful of lending in tough times
Banks are also dealing with a number of factors that inhibit lending. We have seen over 200 banks taken over during the past two years, and the remaining ones are more concerned with survival than with growth. This results in the banks circling the wagons, so to speak, to prevent additional losses. If you want to know more about banks and “credit culture,” I have a free report on “Understanding bank 'Credit Cultures' and how bankers think” just for visiting the SBA Loan Store and signing up for a no-obligation email or telephone session to answer your questions. You can also find several Power Reports based on my 35 years of experience in the financial field.
4. Banks have serious deterioration of their capital base, making it impossible to loan to anyone in many cases.
Most of the money banks take in is normally loaned out to individuals and businesses for their use, in exchange for repayment with interest. However many of those individuals and businesses that took out credit have defaulted and the banks are left with empty collateral in the form of houses and buildings they currently cannot sell off. This depletes the bank’s resources, and in some cases they have had such a deterioration of their capital base that they are unable to make any loans at this time.
5. Banks are being told not to make bad loans. That is Fed Speak for 'DONT MAKE LOANS'
And then there is the government watching over them. They are being told not to make “bad” loans - which is government-speak for “don’t lend.” The concern over defaulted loans has pushed the banks to tighten their standards to the point that even many viable companies are unable to get credit.
6. New federal and state regulations are increasing pressure on banks to clean up their portfolios, increase fees, and make reporting more specific and within Federal regulatory requirements
Banks are being told to clean up the problems that previous government directives have created, plus add more fees to help cover the losses they have suffered. The banks are also being given additional reporting requirements - read “additional paperwork” - that they will need someone to handle. If you are having cash flow issues, would you hire more people or create less paperwork? Put it all together and you have strong dis-incentives to lend to small businesses. And now Bernanke is telling the banks to start lending? Which message do you think they are going to pay attention to?
This is not to say that there is no hope for small businesses looking for credit in the current economic situation. But it does mean that having someone who knows what to do and where to go can be an invaluable asset to any business owner looking for funding. An SBA-guaranteed loan is still the best choice for many looking for funding. I am still placing loans for businesses looking to improve or expand and am ready to work with the right companies. Contact me and we can discuss your needs and ways to meet them.
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