Guest post by Sara Mackey
As we often hear from the "talking heads" on network television, if the domestic recovery is ever to take off, it will be because small businesses are expanding, buying equipment, and hiring new employees. After Lehman Brothers failed and business credit markets constricted in 2008, the small-business sector of our economy suffered the most. Banks all but turned their backs on these firms, citing high credit risks and abundant losses already on their books from "toxic" mortgage-backed securities.
Now we have new data (http://money.cnn.com/2012/01/31/smallbusiness/loans/index.htm) from the Federal Reserve that suggests that loan demand is on the rise from small-business owners, as per the chart below:
As if on cue, our four major banking entities, Citibank, Chase, Bank of America, and Wells Fargo, also released a press release proclaiming their increasing support of this sector with statistics that seem to defy the actual reality of the marketplace. Raymond J. Keating, chief economist at the Small Business & Entrepreneurship Council, stated that, "Many small businesses are either struggling to get by or simply keeping their powder dry when it comes to capital investments, hiring and borrowing." He objected that the majority of banks that he surveyed did not see any increase since most small-business owners are holding back due to the uncertainty in the economy.
Ami Kassar, founder and CEO of Philadelphia-based MultiFunding, also takes issue with the claims of the "Big Four" banks. He notes that their definition of a small business includes firms with as much as $20 million in annual revenue. Companies of this size are more stable, less risky, and able to get the attention of large banks. Their inclusion in the banking data misrepresents their true support of the small-business sector, where annual revenues are more likely to be $1 to $2 million a year. From IRS data, some 95%, or nearly 25 million, of the businesses that file tax returns have less than $1 million in annual sales.
Kassar also had harsh words for the press "stunt" of the big banks, "It's an insult to the vast majority of business owners and entrepreneurs who are sweating it out there and trying to get loans to keep their businesses going. Businesses with under $2 million in revenue have a much easier time getting loans at smaller regional banks that are frankly much more organized to lend to small businesses."
So what is the market reality? "We are entering a new phase of the business cycle," said Bill Phelan, the founder of PayNet. PayNet tracks borrowing by millions of small U.S. businesses and provides risk-management tools to the commercial lending industry. "Businesses are betting on the future with increased investment spending." His survey of the market indicates that the economy is gaining momentum, in spite of the lending practices of our national banks, the political climate, and the debt crisis in Europe.
According to the National Federation of Independent Business, a Washington-based small-business lobbying group, roughly 24% of 781 small-business owners surveyed in November said they were planning capital outlays in the next three to six months. This rate is the highest it has been in forty months, but still below typical levels in past periods of robust economic growth, when the rates were higher by five to ten percentage points. Their report also revealed that 61% of small-business owners say it's harder to get loans now than four years ago.
In another related survey, Biz2Credit analyzed 1,000 small-business loan applications and discovered that banks with assets of more than $10 billion approved 10% of total loan requests in last November, up from 9.3% in October and 9.2% in September. Their data confirms that small-business loan approvals by small banks and credit unions have grown steadily over calendar 2011 and are now roughly half of all applications.
The majority of SBA type loans typically flow from local community banks. Referring once again to research performed by MultiFunding, in 2010, the top 25 banks controlled about 61 percent of all deposits, but made only 20.3 percent of all SBA 7(a) loans. Smaller banks held about 39 percent of all deposits but made 79.4 percent of all SBA 7(a) loans. Â An analysis of SBA loan data provides a clue as to what is really happening:
Firms with the wherewithal to justify loans of a million dollars and up have been the ones to benefit, whereas the multitude of smaller companies have had to scramble over recent years. The "blue" and "red" lines on the chart appear to confirm the sentiments of small-business owners across the country.
What must a small-business owner do under these circumstances to access business credit ? SBA loans will require collateral, typically the equity in your home. With deflated home prices, home equity financing may be a thing of the past for the near term. Local banks will also require collateral and, in most cases, personal guarantees, as well. Interest rates will generally add a 4.75% margin to the prime rate, 3.25% at present, to arrive at an 8% rate for excellent credit. According to the National Small Business Association, "Credit cards are now the most common source of financing for America's small-business owners." The trend in rates for home equity and credit cards are presented in the charts below:
In both cases, your FICO score will determine if additional margins will be applied to any base rate used by the lender. These rates can be tracked at BankRate.com.
Lastly, the Internet today provides a multitude of search engines that will connect you with potential lenders. Rates will be higher in this sector, but, in many cases, these unsecured loans can be approved in 24 hours after applications are returned.