Category Archives: AdviceOnLoan

An Open Letter to Senator Jeff Sessions (R-AL)

By Charles H. Green

Dear Senator,

Why are you investing the prestige of your office and the popular support from your home state to wage a war of misconstrued facts on the U.S. Small Business Administration?

Are you purposely trying to block access to capital to thousands of Alabama businesses (and beyond) by glibly

AP Photo

AP Photo

misrepresenting the nature of the agency’s loan guaranty program and secondary market apparatus?

These programs are modeled as credit insurance, meaning that loan losses are entirely funded by premiums (called “loan guaranty fees”) paid by the loan recipients and an ongoing fee (actually a “tax”) levied on the participating bank. Taxpayers don’t contribute a dime toward loan losses.

To say otherwise places you in the unfortunate company with other anti-SBA crusaders like the CATO Institute, whose dislike for SBA leads them to purposely misstate reality.

You were recognized by the NFIB as a “Guardian of Small Business” in 2006. It’s curious that now you criticize the private-public partnership structure of SBA and the secondary market that provides liquidity to participating small business-friendly community banks, including dozens in Alabama.

Calling it a “moral hazard” in Bloomberg Businessweek is ironic. Maybe you have a problem with capitalism on Main Street?

You voted in favor of the Export-Import Reauthorization Act of 2012 for $140 billion, even though about 80 percent of the appropriation benefits Fortune 500 companies Boeing and General Electric.

You voted for ethanol subsidies in 2005, 2007 and 2013, which costs taxpayers over $7 billion annually and benefits other Fortune 500 companies like Archer Daniels Midland, Monsanto, Shell Oil and BP.

Yet now you grandstand over the paltry SBA, whose 2015 budget request actually went down to less than 3/4 of $1 billion, and whose tens of thousand of financial beneficiaries actually pay their own way.

Perhaps you just need a better coach to explain the SBA to you, Senator. As a native of Alabama, I’d be glad to do that. Call me when you’re ready.

Sincerely,

sig-Charles

 

 

Read more at BloombergBusinessweek.com. 

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New Capital Standards Will Rein in Too-Big-To-Fail Banks

By Charles H. Green

Last week the three federal bank regulators approved a simple rule that could do more to rein in Wall Street banks than most other parts of a sweeping overhaul that has descended on the biggest banks since the financial crisis.

The rule increases to 5 percent, from roughly 3 percent, a threshold called the leverage OCCratio, which measures the amount of capital that a bank holds against its assets. The requirement — more stringent than that for Wall Street’s rivals in Europe and Asia — could force the eight biggest banks in the United States to find as much as an additional $68 billion to put their operations on firmer financial footing, according to regulators’ estimates.

Under the rule, banks with over $700 billion in assets will have to raise their capital, measured by the leverage ratio, to 5 percent of their overall assets. The ratio will have to be 6 percent at the banks’ federally insured banking subsidiaries, where many of their riskiest activities are. These new rules are more stringent to the risk-based asset procedures that are more prone to manipulation.

What do these changes mean for business lenders? Probably a more stable economy and improved confidence in banking. Paring back the risk poised by the too-big-to-fail banks is a positive development, albeit that these changes are not effective until 2018.

Read more at OCC.gov. 

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CATO Institute Still Hates SBA

By Charles H. Green

It’s April and as if programmed by the calendar, the CATO Institute offered its annual diatribe about the U.S. Small Business Administration last week. During this period last year I wrote a column in the Coleman Report about the inflammatory remarks about the SBA by CATO Institute’s Veronique de Rugy … well she’s back.

Some business lenders will recognize the CATO Institute as CATOa libertarian think tank founded in 1974 originally as the Charles Koch Foundation, whose CEO is former BB&T Chairman John Allison. Dr. de Rugy is an adjunct scholar at the institute.

This year, Ms. de Rugy’s narrative in the National Review follows Senator Jeff Sessions (R-AL), whose recent query to the SBA demanded an explanation as the “real cost” of the SBA. It seems that the Senator was following de Rugy’s perennial focus on a narrow list of franchise companies that have suffered extraordinarily high default rates.

Session’s demands to be told what “the real rate of default” is for the 7(a) program and whether certain franchise brands have been excluded from financing eligibility. Once again, Dr. de Rugy repeats portions of her misguided assertions about SBA, which are based on false premises that mislead her conclusions. Repeatedly claiming that SBA guaranteed loan losses impact taxpayers reflects either a stunning lack of program understanding by the distinguished policy researcher or a calloused disregard for facts.

The 7(a) loan guarantee program is by definition, credit insurance. Taxpayers stopped subsidizing this insurance in 2004 (except for temporary budget grants during 2010-2012). Participating borrowers pay a premium of up to 3.75% of their loan amount and lenders contribute a share of their earnings for the life of the loan to cover loan losses.

Following the financial crisis, the federal budget included supplemental funding to stabilize SBA’s budget from extraordinary losses and provide additional funding to assist Main Street business owners – who were not responsible for the crash or recession – with access to fee-free SBA loans for a year. The total costs spread over three years? $1.3 billion.

During the crisis, federal government bailouts to Citicorp totaled $476 billion, Bank of America $336 billion and Morgan Stanley $135 billion. All three banks are among about a dozen that continue to poise a threat to our national economy as a “too big to fail” institution, and are effectively subsidized by investor’s belief that they would be bailed out again.

Why wouldn’t CATO take on this much larger problem and government reach into private enterprise? Why did they fight Dodd-Frank reforms tooth and nail, which were intended to lower the economy’s exposure to problem banks?

If the concerns raised about SBA are based on a sincere question about the value of SBA investments, let’s have it with some real data that reviews capital access, job creation and business growth. If it’s merely ideological sniping, as I believe, Dr. de Rugy is starting to get as old as I Love Lucy reruns, and we’ll all be better entertained by changing channels.

Read more at NationalReview.com. 

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Are You Ready to Use Bitcoins Yet?

By Charles H. Green

Surely you’ve read about the emergence of the virtual currency bitcoin? This innovative alternative to government-issued currency has outlived several similar ideas started over the past few years and is eclipsing a handful of competitors trying to create the next 20110824_hub_0376[1]cgreenback. It’s a Libertarian’s dream of capital outside the control of the state.

Count me among the skeptical and unconvinced.

Bitcoin was developed in 2009 by a reclusive web developer(s) Satoshi Nakamoto as a peer-to-peer payment system. These units, or bitcoins,  are ‘mined’ through a competitive claims process with specialized technology, at the rate of 25 bitcoins every ten minutes. In 2017, this rate will be halved to 12.5 coins  and halved again every four years until the programmed 21 million units have been released by 2040.

All bitcoin transactions will be recorded in a public register called a ‘blockchain’ and the full history of each coin is tracked into perpetuity, according to their bitcoin address, which does not necessarily include the participant’s identity. You can buy them for cash today in nearly any currency through online exchanges or special ATMs.

This currency has a market value based on its perceived buying power and intentionally are exchanged outside the control of any government. The coins have steadily risen in value since inception to a high of $1,100 each, as the idea and enthusiasm for them have grown among many participants worldwide.

But their value has also shown to have significant volatility as the cottage industry around the Bitcoin has not proven to be as enduring – 45 percent of the exchanges have failed. The most prominent exchange, Mt. Gox, filed bankruptcy in February after disclosing that they could not account for 850,000 bitcoins (valued at $500 million), which were believed stolen due to software flaws.

Bitcoin value proposition seems to be that it’s a cheaper and more private manner to transfer payments than cash, credit cards, bank transfer etc. But that provides a major benefit of money laundering, tax evasion and theft, which present new risks to a global economy.

Libertarians love the notion that Bitcoins have a fixed maximum number, which will forever prevent the monetary expansion (or contraction) they vilify.

An article in the Examiner.com tries to make a case that Bitcoins are good for small business owners by giving them easier, less expensive payment options to sell goods or service internationally, but obviously, that’s not the most dominant barrier – finding buyers is a harder problem to overcome.

Personally, I believe the negative potential from this non-state issued currency far outweighs any potential benefit. This currency, if it lasts, will take 10-20 years to be sufficiently useful. It’s hard to imagine how we could drive a $72 trillion global economy with fractions of only 21 million Bitcoins.

Also suspect as this currency’s ‘store of value’ function, required of any viable medium of exchange. As it exists, it’s a speculative investment whose value is difficult to predict or accurately assert.

For my money, pay me with old fashioned Benjamins, please.

Read more at Examiner.com. 

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Handle Business Loan Client’s Data With Care

By Charles H. Green

Knowledge is power – Francis Bacon

As a business lender, you run the risk of literally drowning in information. From the minute we awake, turn on any one of several communications devices or get in our car, there are messages streamed at us or unfolding before us that are hard to avoid.

We are inundated with client information, vendor messages, newspapers, trade association AOL10messages, training programs and yes, the important daily dose of the Coleman Report.

If you work for a bank, you have some extraordinary obligations to safeguard client information. The Bank Secrecy Act (BSA) requires special handling of client data with no unauthorized disclosure about clients to other parties allowed, and even with permission, it should be restricted to only those with a need-to-know basis.

But even after mandated annual training, inadvertent disclosures are frequent as lenders interact with client business among related parties. It might be as simple as sharing business leads or as complicated as what information is disclosed to a third party performing due diligence about the client for the lender.

According to the Georgia State Center for Ethics and Corporate Responsibility, in 2013 there were more than 9 million ID thefts in the U.S., 77 million names with confidential information compromised, 90% of business websites were hacked and more than 1/3 of all companies suffered the theft of intellectual property.

Failure to handle applicant/client information with care can have significant costs, short term and long term to both the client and the lender. Think twice about sharing – or even mentioning – client data or identities when not working directly on client matters.

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Should Business Lenders Care About Reputations?

By Charles H. Green

A couple of months ago I wrote about the disparaging lack of trust that the population has for the financial services industry, particularly banks, as determined by Gallup. More recently, I attended the annual presentation of Edelman’s Trust Barometer and found the results appear to be getting worse.

Edelman is a global communications firm whose interest in ‘trust’ goes to the heart of their Edelmanbusiness. You don’t listen to people you don’t trust. This year seems to be a bad year for ‘trust’ as the global population seems to be losing it in everyone from government (↓16 percent), media (↓9 percent), business (↓ 4 percent) and even NGOs (↓9 percent).

Globally, financial services fell from last year’s 53 percent trust benchmark down to 47 percent, whereas banks fell from 50 percent to 46 percent. These results were moderately better in the U.S.

Another startling discovery in the trust barometer was that online search engines (Google, Yahoo, etc.) match level of trust of ‘traditional media’ (65 percent) for the first time. As other sources of information continue to decline, search is rising as the leading source of validation.

An interesting distinction was pointed out between “trust” and “reputation.”

Reputation is the presumption of trustworthiness, which reflects how others feel about you today. But trust facilitates how they will act with – and for – you in the future. Meaning, your ongoing, evolving reputation forges the degree to which you can be trusted in the years ahead.

Social media and other digital interfaces like Yelp! are opening new avenues for the public to speak to each other to voice positive and negative information. As search engines become more trusted, will the public stop listening to the paid advertising in the traditional media? What are the implications from that change in building and maintaining reputations and trust?

For starters, why not Google yourself and see what can you find about your own reputation?

Read more at Edelman.com.

 

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Another Payment Platform Enters Merchant Cash Advance Business

By Charles H. Green

The proliferation of merchant cash advance companies continues to flourish, except the latest entrant, like other recent payment platforms before it, should give the shadier side of this business some pause to reflect.

According to Small Business Trends, Square is testing a program called Square Capital. So far only a few select merchants have been invited to participate. Invitation seems to be AOL10based on the amount of transactions each merchant is currently processing through Square. This move follows similar programs offered by other payment providers including PayPal Working Capital and American Express Merchant Financing.

Square Capital’s pilot program will offer three funding tiers, each featuring fixed advance costs. During rollout the program offers either 1) a $3,200 advance with a one-time cost of $384; b) a $5,600 advance with a one-time cost of $672; or c) an $8,100 advance with a one-time cost.

Merchants will repay advances respectively with four, seven or ten percent of future daily sale proceeds. Payments continue to be deducted until the initial advance and a one-time cost is paid back.

For anyone believing the merchant cash advance sector is getting crowded, they’re right. But many of these companies are simply reiteration of ‘hard money’ lenders moving from real estate to working capital. Many of these companies have poor reputations, shady dealings and predatory advance rates, which often trap business owners into a continuum of renewals and ever-increasing obligations.

Square and other more reputable providers of this kind of funding, like Kabbage and PayPal, will be taking the cream of the crop in this business with more reasonably priced funding and honest dealings. Their access to raw merchant performance analytics means that they will recognize lending opportunities in real time as fast as the business knows.

Read more at Small Business Trends.com.

 

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Must Business Lenders Offer “Fair” Pricing?

By Charles H. Green

With a plethora of new innovative business lenders opening up monthly, their lending models have come into view more closely as the market gradually becomes more aware of them. “Innovative” is my label, but most others pile these companies into the “alternative” lenders category.

I’m referring to companies delivering business financing directly from investors to small AOL4business owners. Whether merchant cash advance, non-bank lenders or digital platforms acting as the broker/intermediary, these companies are becoming more obvious – and important – to small business owners who still don’t qualify for capital in the brave new post-crisis banking world.

One open debate that is growing around this sector is on the appropriate level of pricing for funds to the small business sector. Most of these companies are collecting 18 to 36 percent for their funding, with actual yields figuring much higher due to the rapid pace at which they reel payments back from borrowers.

Two articulate voices made a case for the opposing views this week.  Ami Kassar, writing in Inc. (“Cash Advance Loans: Bad for You, Bad for the Economy,” March 18, 2014) warned business owners about the “treadmill” of debt that can result from aggressive merchant cash advance companies overextending companies, resulting in perpetual renews and higher loans that will be very difficult to repay.

On the other side, Ty Kiisel points out, “Although specialty financing costs a premium, it makes capital available to business owners who wouldn’t find much luck at the local bank” (Forbes.com, “CNBC List of Top Main Street Lenders Forgets the Elephant in the Room,” March 18, 2013).

Who’s right? In many respects, they both are. Pricing models for many MCAs and lenders in this space are absolutely predatory, and will hasten the demise of many small business owners. Most business lenders know well that many business owners, who will sign on to any terms to get funding, have no clue as to their own financial metrics.

But for other funders (and their customers), this pricing represent a fair rate of return for funding coming from investors making high risks bets with no equity upside. Compared to angel investors, these funds can be a bargain. These borrowers can repay sums and realize strong personal returns on the business growth that was fueled by capital denied to them by a lower-priced bank.

What do you think?

 

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Citibank’s Empty Claims About Small Business Lending Supremacy

By Charles H. Green

The Wall Street Journal touted Citibank’s news release verbatim last week to proclaim that “small business lending reached $9.1 billion in 2013, surpassing three-year commitment to SBA.” Pardon the opinion, but to me it’s all kerfuffle, codswallop and balderdash.

To position Citibank as the nation’s leading benefactor to small business owners is like calling Pope Francis the best preacher in the world. Neither of these characterizations fit the bill, but at least the Holy Pontiff is not Citiflaunting himself to be who he is not.

To brashly publish this representation, Citibank retreats behind the loose “small business” definition in quarterly call reports, which are required by all insured banks. The admirable effort to break out small business loan statistics is often distorted by the methodology of how these numbers are derived.

In the instructions issued by the Federal Financial Institutions Examination Council (FFIEC), this category is merely a measurement of how many loans the bank has on the books to privately-owned concerns for $1 million or less. That may include corporate credit cards, small investor loans and non-profit accounts as well.

This information conundrum can be summarized in the old Lite® beer TV commercial you’ll remember, “Taste Great!” “LESS FILLING!”

So what did Citibank actually do? While WSJ reported $9.1 billion, my calculation of their 12/31/13 call report totals $8.48 billion. Of that sum, $55 million is in Ag loans, $718 million is in CRE loans and $8.488 billion in C&I loans. We’ll never know how many of these loans fit within the SBA’s standard definition of ‘small business.’

For the record, in FY 2013, Citibank made 102 SBA loans (#56) totaling $71.9 million (#44). A couple of their peers did considerably more: Wells Fargo closed $1.47 billion (#1) with 3,481 loans (#2), while JPMorgan Chase funded $486 million (#4) with 3,637 loans (#1).

Read more at WSJ.

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Nothing to Fear But Fear Itself

By Charles H. Green

Maybe you recognize the title line as similar to one of the most famous sound bites from Franklin Roosevelt’s inaugural address? He defeated President Hoover without being very specific about what he would do to get America out of the Great Depression, and immediately became a cheerleading inspiration to millions of Americans.

We could sure use that today. For the past several months leading indicators point to an improving, strengthening economy. There were only 24 bank failures in 2013, down from a high of 157 in 2010. While job growth has come in Galluptrickles and spurts, the U.S. added 2 million new jobs in 2013.

Many sectors – hospitality, construction, retail, automotive, medical – reported climbing revenues in 2013 and bank profits are up across the country.

So it’s curious to read the recent Gallup poll results that found a majority of Americans were worried about money. 55 percent responded that they did not feel better about their financial situation these days, including 43 percent with annual incomes over $240,000. Naturally these numbers grew as respondent income brackets were lower.

Maybe these responses are a learned reaction to adversity. Several articles in recent years have reported on the curious rise in the fear of crime, while crime itself started falling rapidly in the early 1990s and has remained as low.

A 2011 article in Slate.com offers some potentially comparative explanations: 1) perceptions have less to do with trends than personal vicinity; 2) who you are – older people have more fear than younger people, women have more fear than men; 3) personal experience is a big factor.

Now extrapolate these two parallel conditions to the fear of lending. How many BDOs, underwriters and bank presidents are still spooked by the good loans that went bad during the financial crisis. Is it time for some fear counseling?

Read more at Slate.com.

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