Small Business Investment Banking: What Obama Needs to Know as He Works with Small Banks to Unlock Credit
While President Obama has been busy meeting with executives of small banks to encourage them to increase lending to small businesses while pledging to work with bank regulators to "cut some of the regulatory red tape," what seems to be overlooked is how these small banks fit into the greater small business banking landscape.
According to CNBC, Obama has implored these small community bankers to help keep the fragile recovery from faltering by increasing lending to small businesses and supporting a rewrite of financial regulations.
With all the focus on changing lending practices at community banks to unlock credit, Obama may not realize that alternative lending solutions for small businesses have been available all along - if people know where to look. And the solution to the credit crunch isn't so much to work to "cut regulatory red tape" but to encourage small banks to educate their bankers on these alternative financing options like asset-based lending that are available when a business does not fit the bank’s lending risk profile. That way the small businesses can get alternative financing they need until they recover. But rarely do the local banks know how to help businesses get the funding they need, nor are they paid to know how to help them find these solutions.
With the national unemployment rate clinging to double digits, it's critical that we rally behind small businesses - but we need to be able to provide them viable long-term solutions and turn to resources with experience in financial restructuring and a proven track record of providing immediate, innovative, and reliable financing solutions.
And in order to do this, it may be helpful to get a brief overview of the banking landscape. Allow me to color this in for you with some very broad brush strokes. Of course, there are many exceptions, but for discussion purposes here goes:
In Business School the guys who got the A+’s (or dropped out to get to work!) are running the very successful small (now large) businesses. These are the huge profitable hedge funds and investment banks. They are the smartest guys in business, period. Here are a few examples to prove the point: Bill Gates, Steve Jobs, GoldmanSachs, and Blackrock (a private Hedge fund that goes public just before the stock market crashes, and then recently launched a gold investment fund at the peak of the gold bubble).
The guys that got the B’s are running the large cap companies for salaries and working for the big banks, as well as running small hedge funds and working with small businesses.
That leaves the guys who got the C’s. They are working at you regional small bank, or in the small business lending division of the large institutions, serving small businesses. This is not intended to offend anyone, but merely to illustrate the point that even when you get a C you need an appropriate job.
The local banks have a very simple job. They interview small business to see if they fit into their narrow and narrowing acceptable lending profile. One banker was recently quoted saying: “We are going to tell Obama what we need from him.” This statement is ridiculous in many ways, especially since as I mentioned earlier, the guys at the regional banks rarely know how to help businesses get the funding they need, nor are they paid to know how to help them find these solutions. Compounding the problem, large business managers have professional chief financial officers (CFOs) and large investment banks to help with those decisions. Smaller businesses have bookkeepers who are not knowledgeable in alternative lending, and an accountant who only knows about tax reporting, no one else.
The answer to this information vacuum is education. There are plenty of funds available for small businesses but you have to know where to look, who to speak with, and what pricing is appropriate. We see the major headlines about credit remaining tight for small businesses across the country - and yet there's already plenty of funding available for small businesses that need working capital. Alternative financing options, like SBA lending and asset-based lending, can help many businesses get the backing they need when the banks say “No.”
While these loans may cost businesses more in interest in the short-term, they are helpful and necessary to get a business back on its feet.
It is important that businesses find a small business investment banker and advisor who knows the financial landscape for small and mid-cap companies. Remember - these are the guys who got B’s or else they would be running large hedge funds. Instead they run small hedge funds aka asset based lenders (ABL). If there is anything that the small banks could do to help small business is educate their bankers on alternatives for when a business does not fit the bank’s lending risk profile. That way the small business can get alternative financing until they recover or grow to the point that the small banks can actually start lending your grandmother's money to them again.
To find out more more about how your businesses can secure alternative financing, visit US Capital Partners, Inc. at http://www.uscapitalpartners.net/ or call (415) 882-7160.