Yes indeed … all’s well. Or is it? What about small business? Have they fared as well throughout the recovery? Do small businesses have access to credit like they did in 2007? All through the recession, small businesses had struggled to find the capital they needed to grow.
Stuart Papavassiliou, senior editor of the Monitor, asked me to write about some of the difficulties facing small businesses and smaller leasing companies. Opposed to relying on my own limited experience and knowledge, I reached out to the equipment finance and leasing community for input. Research was also gathered from public access forums to see how the Small Business Administration (SBA), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) are responding to the credit strapped small business segment of the U.S. economy.
While the National Federation of Independent Business recently reported that 92% of small firms met their credit needs in January, the momentum may have been initiated back in September 2010 when President Obama signed the Small Business Jobs Act. The bill would establish a new $30 billion Small Business Lending Fund, which — by providing capital to small banks with incentives to increase small business lending — could support several multiples of that amount in new credit extensions.
Karen Mills, head of the Small Business Administration, during a visit to Charlotte, NC in mid-February said, “We’re asking banks to step up and partner with us to fill the gaps that still exist — underserved communities and smaller loans.” Mills said the SBA is trying to increase credit availability for small businesses by promoting new programs and by streamlining the lending process. These programs aim to accelerate the growth of small businesses, and assist in creating jobs.
Mills went on to cite some staggering small business loan figures produced during 2010 by JPMorgan Chase, Bank of America and Wells Fargo. But therein lies a flaw. The definition of small business varies from source to source. JPMorgan Chase identified its $10 billion investment in small businesses as companies with less than $20 million in revenues.
I contacted a group of leasing company leaders whose firms lend to small businesses to gather their input on the question of whether small businesses have adequate access to credit. For those leaders whose companies are small businesses, I also asked that they address the issue of attracting funding for their leasing or finance company.
Paul Menzel, president & CEO of Pacific Financial of Federal Way, WA characterized the situation as follows: “The first thing one must do is define the ‘small business’ borrower. There is ‘small business’ defined as sales of $10 million to $20 million, or there is the ‘small business’ defined as sales of $2 million or less and owned by single or few individuals whose personal credit matters. If we call this the ‘micro business’ sector, which makes up over 90% of all businesses in America, then they are being treated differently. Banks are largely unable, unwilling or ill-equipped to serve this type of credit customer.”
Menzel added, “In the past, this micro-business customer had alternatives to conventional loans or leases in the form of credit cards and/or home equity lines of credit. These alternative sources of credit are not longer available to most micro business borrowers since credit card companies have tightened their standards and almost 30% of all homeowners in America are under water with their mortgage. That leaves independent lessors and third-party originators or brokers to service this segment. This funding source segment has also been trimmed back considerably.”
When asked if small lessors have had greater difficulty obtaining consistent funding sources, Ted Pierce, owner and founder of Insta Lease in Folsom, CA said, “I see more funding sources are coming on line and loosening credit parameters somewhat. Personally I’ve signed up for additional lines but they are credit sources such as A/R financing, factoring, contract financing and the like. Traditional leasing requires far more work to gain approval. By that I mean we had better know our deals inside and out. I’m not complaining. It is just that we are working harder for less money at this point in the economy. I kid my salespeople that we have more lines of credit than we do transactions that fit the molds.”
Scott Wheeler, principal of Wheeler Business Consulting, has 28 years of commercial leasing experience — much of it with big banks. Since 2008, he has been an entrepreneur. Wheeler finds that the market has changed. “For strong end-users there is plenty of money available — and the rates continue to be low for the best clients. All money sources are still seeking a flight to quality and therefore the competition is rightfully fierce for those strongest transactions.”
Wheeler added, “For weaker credits, there is also available funds from sources that are capable of underwriting these tougher credits. These funders are able to secure the transaction with other assets and guarantees. However this money is much more expensive than historic traditional money available to the small-ticket arena. This sector of our industry has been very active over the past few years. The market really functions in the middle between the strongest credits and the weaker credits — often referred to as the traditional ‘B credit transactions.’ This market has and continues to change. There is money available for the transactions in the middle. However, the lease/financing originator needs to add value in order to attract and win these transactions. The originator needs to add value to the credit process and to the ultimate funding source in order to secure funding. Therefore, success and available funds are not available to the masses, but mostly to those originators and organization that know the entire process and concentrate their efforts on those transactions which truly have merit.”
Ben Bernanke, Federal Reserve Chairman, would agree with Pierce and Wheeler. During an FDIC-hosted Forum to Overcome Obstacles to Small Business Lending, held January 13, 2011 in Arlington, VA, Bernanke blamed lazy lending as one of the causes that contributed to small business borrowing difficulties. Bernanke said, “One of the advantages of community banks is they have longstanding relationships, they understand the business better, they know the people. That’s one reason why community banks have stepped into the breach to some extent where bigger banks have pulled back. There are substitutes for lazy lending, which is just the hard work of understanding the business.”
The Fed chairman also blamed low sales revenue for what he described as our inability to get back to the “virtuous circle.” “If the sales come, that will make these businesses stronger, make them more creditworthy and it will be a virtuous circle.” He continued, “That’s right, a virtuous circle. More cash flow and also higher collateral values makes businesses more creditworthy, gives them more credit demand, allows them to expand, allows them to hire. That’s, as you say, a virtuous circle.”
Sheila C. Bair, chairman of the FDIC agreed. At the same forum, Bair stated, “The lion’s share of the lending — made during the crisis we were discussing earlier, the large bank loan balances were down about 11% during the crisis. And at community banks, their loan balances went up almost by 4%.” Later Bair commented, “Again, a nod to the community banks; I think they deserve it. I think they’re more high touch lenders, and they do tend to typically have a more intimate knowledge of their borrowers. I do think that’s one of the reasons why their loan balances have remained stronger throughout the crisis than some of the larger institutions that have been more remote relationship sometimes with their borrowers.”
Last year I wrote about The New Reality, about the changes that had occurred in credit philosophies throughout our industry; about how the pendulum had swung to the conservative side and needed to shift back toward center. Apparently, what Wheeler describes as ‘B credit transactions,’ and what Menzel calls ‘micro-business customers,’ continue to struggle to obtain credit. Community banks, independent lessors and the broker community are actively working to fill the void — but not without pain — as noted by Wheeler and Pierce.
Let’s hope that the pendulum never swings back to where it was when spreads were unbearably low and nearly every customer who applied was granted credit. Yet it is clear that a correction is needed — especially for small business customers.
If you have a different opinion, please drop me a note at [email protected].
No tags available
