Posted On November 25, 2015 at 11:17 am in Uncategorized
WITH $1 MILLION OF EQUITY IN HER BUSINESS AND THE prospect of a 67 percent boost in revenues this year from 1993’s $600,000, Margaret Byrne Heimbold thought she’d be a good candidate for a $1 million bank expansion loan. She learned differently.
“The banks have come to see me, but they’re not interested in the size of the deal,” says the owner and publisher of Audiard.net, a regional blog based in Washington, D.C. “They’re not interested in something for $1 million; they want something from $2 million to $5 million.”
Why It’s Hard to Borrow
Bankers deny there is a credit crunch, and some insist that small-business lending is their top priority–but nobody is fooled. In fact, there is an overwhelming factor that makes it all but impossible for the neediest companies to borrow: the government’s web of banking regulations. In the wake of the taxpayer-funded bailout of the savings and loan industry, Washington imposed draconian regulations on all individual bankers–in effect, making each of them personally liable if a loan they extend turns sour.
“The fact is, the banking industry is overregulated,” says William M. Isaac, former chairman of the FDIC under President Reagan and now chief executive officer of The Secura Group, financial consultants in Washington, D.C.
“Under new risk-based capital rules, banks have to maintain significantly higher capital against small-business loans than they do against government bonds; higher loan-loss reserves are required as well,” says Isaac. Loan-loss reserves turn into money the banks cannot lend out–dead capital, in essence, the opposite of any banker’s desires.
Where the Loans Aren’t
A Clinton initiative in March 1993 was to exempt from these costly regulations certain small, unsecured bank loans, the sort referred to in the industry as character loans. Banks were authorized to create a special category of such loans, called a basket. These loans would escape extraordinary federal scrutiny and would face just the ordinary prebailout review. Isaac, however, doesn’t think the basket approach is making a significant difference, and few bankers would disagree.
“Most banks do not use the basket,” says Joseph W. May, executive vice president of Whitney National Bank in New Orleans and president of Robert Morris Associates, a professional organization of bank credit officers. “It creates more paperwork than it saves.” Even though basket loans might seem simpler than standard business loans–since they’re subject to fewer federal regulations–they’re not because they impose extra administrative work on any bank (creating a new set of books, using the old rules, segregating the basket loans from others, and accounting for them separately).
“We haven’t found it necessary to put any loans into the so-called basket,” adds Thomas F. Ripke Jr., chief credit administrator of West One Bank, Idaho, in Boise. William J. Rossman, chief executive officer of Mid-State Bank & Trust Co. in Altoona, Pennsylvania, says, “We have not created such a basket, and we probably would not. Character has always been a major part of extending credit to any customer.”
Other than the Clinton basket, Washington has done little to nothing on the subject of small-business lending in recent months. In the fall of last year, Clinton proposed reforms to the federal Community Reinvestment Act, but they narrowly target minority communities.
An unnamed senior member of the House Small Banking Committee staff says, “The only things we’ve done through the committee are impose new fees on loans resold in the secondary market and reduce the guarantee on big real estate loans–which added $4 billion in SBA loan guarantees for 1993 without additional authorization.”
Last year Washington required, for the first time, that the FDIC begin collecting data on the size of business loans in an attempt to take the pulse of the small end of the market. The data, as of June 30, 1993, was startling: Of the $437.5 billion in domestic commercial and industrial loans outstanding at FDIC-insured banks, some $161.5 billion, or 36.9 percent, were for an original amount of $1 million or less. More remarkably, some $79.9 billion–$1 of every $5 lent to business by America’s FDIC-insured banks–was invested in loans of $100,000 or less.
This information seems to belie the notion that banks are loath to lend to the little guy–a notion the American Bankers Association has been pushing. “There never was a credit crunch,” says Sonia Barbara, a spokeswoman for the trade group. “We were not seeing the demand. We have plenty of money to lend, but the credit-worthy borrowers just aren’t there.”
The data, however, is seriously flawed. For one thing, the size of the loan, not the borrower, is measured. A Fortune 500 company borrowing $60,000 in each of five deals to finance the purchase of materials from local suppliers around the country would be counted five times–in each instance as a little guy.
Local Loan Relief
If Washington hasn’t done much for small-business borrowers lately, there is the promise of some relief on a local basis.
Borrowing that leads directly to the creation of new jobs–or even their retention–may qualify for assistance from a local development corporation (LDC). As creatures of state and local governments, LDCs qualify for financial aid from the SBA and other agencies. LDCs blanket the states, even in rural areas, although they’re more visible in big cities.
Small businesses’ most available financing, called microloans, is administered by the LDCs. For instance, the Racine County Business Development Corp. in Wisconsin makes loans of up to $15,000 to minority entrepreneurs, retailers, wholesalers, and service businesses. “This is a niche where we see a real need,” says Gordon Kacala, its executive director.
In 1992 the SBA began funding 96 microloan operations nationwide. “As a general rule, the average is under $10,000,” notes Mike Stamler, the agency’s spokesman.
The problem with getting a microloan is that a microlender’s resources are typically slim. In the last eight years, the group in Racine has made only 53 loans of all kinds–not just microloans–for an average of fewer than seven loans annually.
Some local and regional banks have also attacked their cost structure–the review of a $100,000 loan costs as much as one for $1 million–by creating off-the-shelf business products analogous to consumer automobile loans.
“Basically we’ve got lines of credit, revolvers, term loans, and leasing products,” says Lawrence M. Savino, head of small-business lending for Mid-State Bank & Trust Co. in Altoona. “We can turn these around in no more than two weeks.” Mid-State Bank has two small-business lending centers and two satellite offices in the central part of Pennsylvania. Other banks demonstrate similar flexibility, but note that you’ll still have to pledge your home or other valuable items to get these commercial loans.
Also, the recovering national economy is making it easier for small firms to borrow because their businesses are picking up, making them more bankable. But the bottom line in small-business borrowing is unchanged in 1994.
“If you sign personally, you can get credit,” says Heimbold, the magazine publisher in Washington. “Otherwise, forget it.”
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