Will White House Prodding Affect Bank Lending to Small Businesses?
While Obama has been calling on the nation's biggest bankers to provide more small-business loans, business owners who need working capital are left wondering when if and when the administration's efforts to boost credit will pay off - if ever.
According to the Washington Post, President Obama has said: "America's banks received extraordinary assistance from American taxpayers to rebuild their industry. And now that they're back on their feet, we expect an extraordinary commitment from them to help rebuild our economy."
The banks will pay lip service to the latest political pressure on lending but there will be no substantive changes. The reason that there will be no substantial affects on bank lending to small business due to White House prodding is because commercial bank lending is formulaic. In simplest terms, your grandmother puts her savings in the commercial bank, the government guarantees that deposit, the bank prudently loans it out to business based on their proven ability to pay it back. The assessment as to whether the business can pay it back is called underwriting criteria.
Businesses are currently financially stressed due to the recession so demand from credit worthy borrowers for loans is down. In addition, the number of credit worthy borrowers is down. The banks cannot “lower their standards” to make more loans because they will end up with another large group of defaults like they now have in real estate.
The solution to this dilemma already exists as there are plenty of alternative lenders to the commercial banks. Asset based lenders (ABL) and factors have always made loans to small and medium sized business when they were too risky for the commercial banks. Many times loans can be made at rates as low as or just slightly higher than commercial banks. On the surface, this sounds like good news, but the problem is the ABL world is fragmented and made up of many smaller regional lenders with varying appetites for loan types.
It is very difficult for businesses to find appropriate lenders in this space. Hence the small business credit “crisis” is a crisis of information...
....Ironic in the information age. But the truth is that there's plenty of funding available for small businesses who seek out alternative lenders.
Banks may use politics as a scapegoat to justify their lending practices, but overall, the system from banks is the same. So even White House prodding isn't going to affect small business lending.
Banks are responding with political window dressing. If you like what happened when the feds lowered the standards on mortgage lending creating the “great recession” when the real-estate bubble burst you will love it if they lower the standards on small business lending.
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