Occupy Wall Street: Its Impact on Banks and Credit Unions

Occupy Wall Street (OWS)Ever since Occupy Wall Street began life last September in Manhattan’s Zuccotti Park, it has sought to spark a national debate on our economic system and the way its spoils are divided. As an investment banker and small business lender, I am often asked about the movement and its impact on banks and credit unions. Here are my thoughts on some of the questions I get asked most often:

  

Has anything changed since Occupy Wall Street first began?

Smaller banks and commercial finance groups are starting to speak up about bad service and unfair competition from the bailed-out (“too-big-to-fail”) banks and about how inefficient they are. Also, I believe the reversal on debit card fees is a direct result of Occupy Wall Street, which helped fuel the consumer backlash. The protests and media coverage certainly amplified concerns and heightened the conversation. It’s a claimable victory for Occupy Wall Street.

Have smaller community banks and credit unions benefited through customers moving their money out of the large Wall Street banks?

 
Smaller banks may have benefited in increased deposit relationships at the beginning.

Have bank customers become more polarized?

 
Absolutely. Occupy Wall Street needs a bit more direction and few bullet point issues to rally around. In the early stages, the movement was driven by a general feeling of malaise, but as time goes by there will likely be a rallying around a few key issues. This is when the movement will really gain momentum. Whoever strikes the note will emerge as a thought leader in the space.

Have lawmakers listened, and if so, what are they saying in an election year?

 
Nothing. They are still clueless and afraid.

In this instance, is social media’s bark bigger than its bite?

 
I don’t think so. Wait for the weather to get better in spring and summer of 2012. The movement will explode, and social media will prove to be a potent rallying force in its support.

Keep in touch with the team at US Capital Partners: Tweet us at @smallbizlending and share your thoughts on Occupy Wall Street (OWS).

It’s Time to Break Up the Bigger Government-Supported Banks

According to The Wall Street Journal, “Smaller U.S. banks and savings institutions are cutting jobs in a sign of a deepening financial-industry retrenchment that is shaking firms from Main Street to Wall Street.” More than 2,500 banks cut their work forces in the third quarter of 2011, reducing their staff by a combined 20,332 jobs, or 2.5%.

Small community banks are, of course, the lifeblood of small businesses. This is therefore a worrying development, with the potential to sink the U.S. economy into a second recession, if not properly addressed. It’s high time we broke up some of the bigger government-supported banks and better regulated their product offerings, which have become too diversified and create systemic risk. More smaller banks obviates the “too big to fail” conundrum. This then breathes life into the smaller regional banks, which are closer to their communities and borrowers and are better able to evaluate financing realistically.

Large government-supported regional branches of behemoth banks run by 18-year-old, high-school graduate “store managers” (or in the words of The Wall Street Journal, “straight-out-of-college branch-manager trainees”) are not going to make intelligent credit decisions and loans to smaller businesses in need. They are going to err on the side of conservative formulaic lending, which is choking off credit. As a model of success, look at asset-based lenders—a diversified, fragmented group of small commercial lenders in excellent financial condition that continues to lend to smaller businesses despite the ongoing constriction in small business lending by the bigger banks.

Bridging the Gap in Small Business Lending

US Capital Partners is one of the few investment banks able to step in and fill the “gap” between what lenders offer and what borrowers really need. US Capital Partners will be attending the “Funding the Gap” panel on Thursday, November 17 (2:15pm to 3:30pm), at the Commercial Finance Association’s 67th Annual Convention in New York, at the Marriot Marquis. Come meet the team at Booth #105 at the Convention from November 16th through the 18th. 

The small business loan market remains stalled, as commercial banks keep lending standards tight and maintain an even tighter grip on capital. Alternative lenders are making a strong effort to bridge the ongoing lending gap. As the competition escalates, yields are being pushed downward, and alternative lenders are becoming more aggressive in their marketing, drawing attention to creative deal features and flexible loan structures.

While this is good news for borrowers, alternative lenders continue to focus predominantly on middle market companies. In our experience, there is still a giant lending gap in cash-flow, second-lien, and mezzanine loans for small businesses, especially companies with under $5 million in trailing EBITDA. Very few alternative lenders offer, for instance, $1–3 million cash-flow strips, which are truly a “gap” piece.

The Marriot Marquis, NY.There is also a visible gap in equipment and real estate term loans, and also in growth-capital term loans, for small businesses. One of the reasons for the lending gap is that servicing these types of smaller loans can be expensive and time consuming. There is also a barrier to entry, with most alternative lenders lacking the necessary due diligence and underwriting skills to make these loans in the first place.

 

At US Capital Partners, we’re one of the few investment banks for small businesses that truly bridges the lending gap. We provide cash-flow terms loans of $1–5 million and upwards to bridge an asset-based lending or factoring shortfall. We also provide equipment and real estate term loans, as well as growth capital financing, to small businesses.

Are Banks Starting to Make More Loans?

According to a recent article in The New York Times, several of the nation’s biggest banks have reported significant increases in lending. Amidst the economic turmoil, the article states, “the banks have quietly turned on the lending spigot.”

However, a closer look at the state of bank lending reveals that it is nowhere near where it was in 2008, when the financial crisis unfolded. If you adjust the figures for one-time accounting changes, you find only modest increases in bank loans.

Source: Federal Reserve and The New York Times

More importantly, commercial loans remain heavily weighted toward larger companies and the strongest corporate borrowers. Small businesses continue to find it difficult to get the financing they need.

According to the “2011 Mid-Year Economic Report” published by the National Small Business Association, 36% of small businesses reported they were unable to get adequate financing. In other words, more than one-third—which could translate into more than 10 million—of the nation’s small businesses remain “underbanked.”

Small Company Financing Solution for Large Corporation

Recently, I met a CFO who, like me, had just missed a flight to Europe because of a delayed connection. That turned out to be fortunate for both of us, because as we were waiting for our next flight, we talked about his large company and his financing problem and found a creative solution to the financing issue he was trying to resolve.

It turns out this CFO is running a leading worldwide manufacturer that supplies companies like Calvin Klein and Diesel. This was a €300 million publicly traded company. However, the company’s European bank was no longer able to provide it with the credit it needed for all of its divisional operations abroad. The smaller divisions were no longer allowed to be part of the parent company’s borrowing base. This large public company had a foreign subsidiary selling directly to the United States. Financing was proving costly for the company, because it was more difficult to perfect title on these accounts receivable assets originating abroad. The company had a modest sales office in the US.

Solution: Big Company in Need of a Small-Company Financing Approach

US Capital Partners advised the CFO to make an inter-company transfer of its merchandise to its US-based company, which then would generate the invoices to its US customers. This resolved the collateral securitization issue. Through this elegant solution, US Capital Partners was able to secure a very reasonably priced credit facility of $6–8 million for the company’s foreign subsidiary, using these newly created US-based assets as collateral.

Many larger companies have divisions that need financing. In today’s lending climate, these companies are finding themselves “underbanked.” Traditional uni-tranche lending from the commercial banks continues to be increasingly difficult to find. CFOs of big companies are increasingly finding themselves in need of small-company financing solutions. If you have financing needs and need expert advisory and solution ideas, contact us at www.uscapitalpartners.net

Jeffrey Sweeney | 1 Comment | Share Article

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