For small business, loan well is still dry

  • Article by: JENNIFER BJORHUS , Star Tribune
  • Updated: January 21, 2012 - 11:34 PM

Ongoing credit crunch thwarts growth, dreams.

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research2dayJan. 22, 12 5:41 AM

Bankers, .... What a racket. Don't kid yourself. I'd rather go to individual investors, friends, family, anyone but a banker. Just keep in mind those 23% credit cards they are so willing to provide to you. But when it comes to a business loan, they aren't interested. Hmmmmm, wonder why.

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grizzly2011Jan. 22, 12 7:35 AM

Banks are not in the business of making risky investments and NEVER have been. The old saying was that banks only lend you money when you have money and that is true. Banks only lend when you have sufficient COLLATERAL to cover the loan in case of default. Businesses such as the one mentioned in this article have another avenue for financing: EQUITY INVESTMENTS. A business owner who needs money can approach an investor to be an equity partner and in exchange give up a share of ownership. This is how Google, Yahoo, Facebook, LinkedIn, Twitter, and many, many other companies got started, especially companies with a high risk of loss such as technology or medical device startups. The investor risks his money and hopes for a nice rate of return on investment. Equity investments are much more expensive than bank loans, and always will be. Why? Because banks only lend when you have collateral! Equity investors are willing to take the risk of losing part or all of their investment in exchange for a rate of return high enough to compensate them for the risk. Banks are NOT in that business and NEVER have been! I wish the media would STOP perpetuating this LIE that businesses can't grow because they can't get loans because banks have NEVER fulfilled this role in the capital markets; equity investors did and still do. Anything with more than a tiny probability of loss is not suitable for a loan. That is what equity investments are for. Banks do not make loans for obscure, hard-to-sell equipment and do not make loans for payroll unless there is collateral! No collateral, no loan!

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research2dayJan. 22, 12 8:13 AM

Let me if I have this right: A bank borrows you $100,000. They use $10,000 of their funds on hand (depositor's money), and borrow the rest from the Fed at 0% - 0.2%. They then charge you 8 - 12% interest...... I'm sorry; I'm not seeing much risk over the course of the year. But then again, why give a small business a loan at 8 - 12%, when they can instead approve a credit card with a $100,000 limit at 23%. Are you getting the drift of it all now???

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research2dayJan. 22, 12 8:17 AM

grizzly2011, That's a great model, and as ubiquitous as it is, it doesn't state the reality of the situation. If in fact, it is all that simple, then the banks don't need the government money they keep taking. If they really had a sense of community, fine, stay with your model; but don't work both sides of the street and take only the cream of the crop of loan traffic AND take the Recovery dollars which were intended solely for small business loans.

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dakmarknetJan. 22, 12 8:24 AM

This is called capitalism. The article points out these small business adventures need the feds help in securing loans. However, such groups as the Chamber of Commerce and NFIB, which small businesses contribute to, despise the fed's assistance in setting regulations/parameters to protect the banks from over-extending themselve. In case you missed it, you just saw what happens when they do (recession.) But there is another way. Small businesses are prime candidates for venture capitalists to swoop in, take over the business, mortgage the assets, liquidate employee pension funds, steal profits, and leave the company in Chapter 11, then disappear. Welcome to Romney's world!

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jplamp9Jan. 22, 12 8:32 AM

My small business has a relationship with 2 banks - a community lender and a large top 10. Both banks continuously ask us if we need any $. They contend lax demand due to most small businesses prefer to wait for stronger signs of economic recovery before borrowing.

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swmnguyJan. 22, 12 9:00 AM

A major contributor to this situation is that many banks are still concealing how bad their financial condition is. Many banks, using highly leveraged fractional-reserve money, have lost more than their entire net worth in real estate. We're not done yet with the losses in residential real estate, and the commercial real estate market is just starting to "roll over."

The biggest banks are surviving by hiking fees, extracting as much as possible from their current loan portfolio, and arbitraging bailouts and playing for time while they swap worthless assets for taxpayer money via the Federal Reserve. Most banks would fold outright if they had to balance their books today. They're only surviving because the Federal Reserve is allowing them to cook the books; claiming loans are 100% good when they haven't received a payment in years, as long as they don't officially foreclose; and swapping real money for worthless notes. That's why we have a huge "shadow inventory" in real estate that dwarfs official statistics. That's why residential real estate prices are still going down, and commercial real estate is about to crater.

If the collateral is there such that a bank can seize more than 100% of the value of a loan in case of non-payment, banks will make the loan. Some of what small businessmen are experiencing now is a return to the lending standards of 20 years ago, when we still had meaningful regulation of banking activity, as opposed to plentiful but meaningless regulation which we have now. In the past couple of decades, loan money was more plentiful than dry leaves in October, but that was an aberration. Many small businessmen got used to a false economy.

Add that to the fact that many banks are in a state of suspended animation right now, and it's a recipe for a long, slow grind as the economy fundamentally restructures itself. "Recovery" is not the right word for what is happening, and will continue to happen until the Finance system cures itself of its self-inflicted cancer. These businessmen are going to have to self-finance, or make themselves vulnerable to venture capitalists, or learn that growth at any cost is an obsolete business model, or go out of business.

Painful as it is, it was the "growth at all costs" mentality that has led to the serial asset bubbles of the past few decades. It's time to retire that cannibalistic mindset before it destroys America. If you're in business and you bring enough to pay your people, your bills and yourself, you're doing well. Is there something wrong with not becoming a billionaire on borrowed money? America didn't become strong and rich and great by borrowing money at interest from banks, regardless of what bankers will tell you.

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thatisright1Jan. 22, 12 9:23 AM

Dodd-Frank is causing a lot of problems outside of Wall Street this will stifle what little growth we are experiencing. I just completed a loan with a community bank (after talking to 20 different bankers and failing to get funding) that was thriving with millions of dollars in reserves only one year ago. Now, after the passage of the Dodd-Frank Act, some of the loan written by this bank were interpreted differently by the bureaucrats out in D.C. and the bank nearly collapsed because they were required by the Feds to have more cash on hand. These bureaucrats from D.C. know NOTHING about the rural agricultural economy where this bank (and sister banks) are located, yet they fill compelled to enforce restrictions to growth, development, and the operation of what had been a successful business. Thankfully, the bank was able to secure additional funds from local investors. But, this process and the ramifications of the Dodd-Frank Act are a perfect example of what's wrong with Washington. GET OUT OF OUR WAY!!

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jerryaldiniJan. 22, 12 9:38 AM

Don't waste your time with banks. They lend only when 100% of the risk is removed, which eliminates 95% of small businesses. A whole new underground movement of lending is taking place outside of conventional banking, and that's where businesses need to start looking for capital.

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pitythefoolsJan. 22, 12 9:55 AM

When a bank can borrow from the Fed at nearly 0%, and invest that borrowed money in T-bills at 1% why would they lend to anyone at all? Must be hard to be a banker now days.

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