SEC Adopts Final Rules Per JOBS ACT for Small Companies

By Charles H. Green

Late last week the Securities and Exchange Commission (SEC) announced the adoption of final rules to facilitate smaller companies’ access to capital that update and expand Regulation A, an existing exemption from registration for smaller issuers of securities.  These rules were mandated by Title IV of the Jumpstart Our Business Startups (JOBS) Act.

The updated exemption enables smaller companies to offer and sell up to $50 million of SECsecurities in a 12-month period, subject to eligibility, disclosure and reporting requirements.

“These new rules provide an effective, workable path to raising capital that also provides strong investor protections,” said SEC Chair Mary Jo White.  “It is important for the Commission to continue to look for ways that our rules can facilitate capital-raising by smaller companies.”

The final rules, referred to as Regulation A+, provide for two tiers of new securities offerings:

  • Tier 1, for offerings of securities of up to $20 million in a 12-month period, are restricted with not more than $6 million of the security-holders to be existing affiliates of the issuer;
  • Tier 2, for offerings of securities of up to $50 million in a 12-month period, are restricted with not more than $15 million of the security-holders to be existing affiliates of the issuer.

Both Tiers are subject to certain basic requirements, while Tier 2 offerings are also subject to additional disclosure and ongoing reporting requirements. The final rules also provide for the preemption of state securities law registration and qualification requirements for securities offered or sold to “qualified purchasers” in Tier 2 offerings.

Tier 1 offerings will be subject to federal and state registration and qualification requirements, and issuers may take advantage of the coordinated review program developed by the North American Securities Administrators Association (NASAA).

The rules will be effective 60 days after publication in the Federal Register. Read more information at SEC.gov.

Reaction by the the Equity Capital Formation (ECF) Task Force, a group comprised of individuals from across the country’s startup and small-capitalization company ecosystems, was swift and supportive.

Jeffrey M. Solomon, Co-Chair of the ECF Task Force and President of Cowen Group commented, “We applaud the SEC for its ongoing efforts to enable small company capital formation. The new rules, which include modifications to Regulation A, are an important step towards making Regulation A+ a viable alternative for small companies seeking access to public capital.”

Scott Kupor, Co-Chair of the ECF Task Force and Managing Partner of Andreessen Horowitz added, “Regulation A+ establishes a more useful and practical means for growth companies to raise capital, achieving the intended goals of Congress. Improved access to capital, while balancing investor protection concerns, will provide these companies the opportunity to grow and create jobs in the private sector.”

Read more about the Equity Capital Formation Task Force here.

What do you think? Comment on this page or write me at Director@SBFI.org.

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Lenders Should Confront Misleading FICO Myths

By Charles H. Green

If you’ve been following AdviceOnLoan for very long, you know I’m not a fan of the FICO score, and have expressed my views her more than once. But in the absence of another path to getting to at least a valid starting point for understanding the credit analytics of a business owner, FICO is going to be a part of the loan underwriting mix for the foreseeable future.

There are plenty of advisors in the market that do understand FICO–you can be a certified UmbrellaFICO expert, in fact–and have been trained to manage the inadvertent ratings that FICO can create. One of those experts is Ms.Tracy Becker, whose company, North Shore Advisory, helps individuals deal with the upside down FICO scores that do not accurately portray their own creditworthiness.

Tracy publishes a lot of good advice that can be as useful to lenders as it can be for the borrowing individuals. For lenders, when you’re confronted with a very low FICO score in an otherwise sterling loan application, it might be easy to simply ignore it and explain credit scores away in a loan memo. But if that application is closer to the dividing line in your loan decision matrix, a poor FICO score might be the tipping point leading to loan declination.

In our Excel@Sales column, I suggested gathering good advisory resources for your borrowers and loan prospects, and keep them handy for when you must say no in a situation that can definitely be turned around. My recommended lender tool box can be a quick answer to get your future borrower repaired and back on the road to capital.

And what better tool could you offer than to help someone navigate through FICO’s maze of factors, which can cause many deserving business owners to stumble, than credit score advice? Here’s an abbreviated sample of kinds of issues Tracy is tackling–some of the myths about FICO scores–in her LinkedIn posts, which can be a helpful start to resolution for your clients, and a good start for your own tool box.

Fewer credit cards are better for credit?

This is incorrect. In my 25 years of experience the highest credit scores I have seen are on credit that reflects many credit cards and varied types of active old credit. If you think about it logically it makes sense. If you were a lender would you rather lend money to an experienced borrower or someone whose experience is limited?

Checking your credit will reduce your credit scores?

If an individual checks their own credit it will not impact their scores at all. They could run their own reports 40 times in a day and nothing would change on their scores. These credit pulls are called “soft inquiries”.

Third part credit inquiries hurt credit scores

For some, one more third party inquiry (also called a “hard Inquiry”) will hurt scores dramatically and for others it will not. Since we are all scored differently there is no way to know exactly how much another third party inquiry will impact scores.

Authorized user accounts will not impact my credit.

If there are open active primary accounts on credit reports, authorized user accounts can impact credit in a positive or negative way. If the authorized account is older than current accounts, has a good payment history, and the balances are low the account can increase credit scores. On the other hand, if the account has a poor payment pattern, high balances, and it is brand new it will hurt credit scores.

There are many more articles offered by Tracy Becker that cover a broad range of issues some of your clients may face–send them to her LinkedIn page for more information.

Read more about her company at North Shore Advisory.

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Gov’t Lending Consolidation Proposal Exaggerated–Analysis

By Charles H. Green

Over the past three years, there’s been some broad suggestions in high places around the idea of consolidating some of the business financing functions of several federal government agencies into one organization. The idea stems from a common political goal used to win elections by promising to trim costs and add efficiencies to the delivery of government services, which in this case would be Main Street capital. Turns out most of that talk was long in the tooth and short on the money.

The Obama administration made overtures in 2012 and as recently as their 2016 budget blueprint about merging several agencies related to international trade, including the In-Depth AnalysisOffice of U.S. Trade Representative (USTR), Export-Import Bank (Ex-Im), Small Business Administration (SBA), Department  of Commerce (DOC) and Department of Agriculture (USDA). Speculation was rampant that there was a major roll up in the offing that would have the financial elements of these agencies all disappear into the mammoth Department of Commerce.

And while it turns out that the president’s suggestion was actually much smaller in scope than was reported, Senator Richard Burr (R-NC) did introduce legislation in early 2014 to merge the Commerce Department, Labor Department and Small Business Administration into one agency. But that bill has not been heard from since.

Nothing New

Turns out that the big idea really focuses on coordination rather than consolidation, and in this president’s iteration, is limited strictly to international trade financing. Further, it’s not an idea that originated in 2012, but rather in 1983.

Senator William V. Roth Jr. (R-DE) introduced legislation to establish a “Department of International Trade and Industry” in January, 1983 in response to rising international trade competition American companies faced from the Japanese, which was thought to have been greatly enhanced by their Ministry of International Trade and Industry.  The bill died in Congress the following year.

But many voices in the federal watchdog Government Accountability Office (GAO) and Congress perennially suggest that some of the international trade programs and related services provided by multiple agencies sometimes overlap and often not clearly coordinated in their delivery to the public. If you need convincing, visit the GAO site’s search page for government resources and type in “international trade promotion;” You get 6,152 results from Uncle Sam alone.

According to government and non-government sources who were involved, the more recent efforts of the Obama administration centered solely on international trade finance, and started in the president’s first term with a task group organized from several agencies. The group, which included political appointees and career staff levels, was convened to work out a roadmap of how to improve the federal government’s delivery of trade financing in an effort to boost American exports and support other stimulus efforts to get the economy humming again following the Great Recession.

One party in attendance reported that it was a friendly and very successful effort in developing a concept through which these various agencies would provide a single menu of well-defined trade financing products and services to different sectors of the domestic and business communities.

But it was clear to all parties involved that this would be conducted without separating any of the specific programs from their respective agencies, and without combining these agencies under one roof.

Mixed Signals on Complicated Goals

“We all thought that delivering a joint product line would be much more efficient and take much less time than trying to create a new agency,” said one source on the condition of anonymity, since he has not been separated from the government for two years and is subject to a non-communication requirement. “At the end of 2013, the work was moving ahead nicely with marketing to some banks already in process under a pilot program.”

Still, there are mixed signals that tend to aggrandize what’s really taking place, or at least that leads to a misunderstanding as to what is the intended outcome. According to news reports in February, the revamp would put the USTR, Ex-Im Bank, Overseas Private Investment Corporation, US Trade and Development Agency, SBA, parts of the DOC and rural business programs at several agencies under the same roof.

“By bringing together the core tools to expand trade and investment, grow small businesses, and support innovation, the new department would coordinate these resources to maximize the benefits for businesses and the economy,” said Commerce Deputy Secretary Bruce Andrews at the time.

But according to parties with direct knowledge of the task force, merging agencies is not in the cards. This effort has long since been trimmed to adding efficiencies to a much narrower set of programs related to trade finance.

“One way of looking at the proposal is that businesses should be able to go to one government agency for their business solutions throughout their life cycle,” said one federal agency employee not authorized to speak on behalf of the government.

Increasingly, businesses are being encouraged to sell in global markets, if only for their own survival.  The opportunities are significant.  In 2013, 35% of all U.S. exports were made by small firms—over $700 billion, which is significantly larger that the U.S. government procurement market, which receives much more attention.

To facilitate this proposition, the inter-agency planning group would ideally eliminate programs that overlap and reduce redundancies, and therefore the number of agencies that a business needs to touch in order to get their needs met. It sounds like a great idea on paper, but effecting that into policy is more of a challenge.

The problem is delivering on that promise means changing budgets, encroaching on turf and the raw ‘takeaways’ that many vested interests don’t really favor. Plus, there’s plenty of room for mismatched interests and missions, where the popular notion of “overlap” is actually quite small, or by design due to the different constituencies served.

Competing Priorities and Managing Headaches

Consider the USTR, which is essentially the government’s political arm for international business. Connecting them to this proposed inter-agency mishmash faced push back early on: they don’t provide direct services to U.S. citizens.

Where does the DOC fit into this mix? They don’t lend capital or guarantee financing for Main Street companies. But they do provide an enormous volume of research, market intelligence and other valuable information that can help U.S. companies fast track their entry into new markets.

The magic for the DOC courtship was trying to help get more of their marketing resources into the hands of the same business owners getting financial assistance from SBA, Ex-Im or USDA’s B&I program. But that goal was largely accomplished–twenty years ago–with the establishment of the 20-odd U.S. Export Assistance Centers, which are scattered across the county.

Still, there is plenty of interest in working out ways to streamline service delivery and work together more effectively, as the political side of the table urgently needs more exporting for the American economy. The agency side has their own headaches to manage and are searching for ways to deal with them among the working group.

Consider the Ex-Im Bank’s mandate for providing 20% of their credit guarantees to small businesses, a requirement adopted by Congress a few years ago. The agency was really developed to finance railroad locomotives, jet airplanes, hydroelectric dams and other major transportation and energy projects. But the small business requirement means that for every Boeing 747 (cost $357 million) they write credit insurance on, they must find $72 million in small business projects to back.

The SBA entered international finance only in 1980, but has been fairly adapt at that line of financing, with which they realize the lowest level of loan losses. Their underwriting and centralized servicing centers make them more efficient at dealing with smaller transactions, and after all, their mandate is small business.

Whether SBA could be given authority to manage Ex-Im’s small business transactions or not is a question well beyond this working group (not to mention that Ex-Im is presently in a fight for their existence with conservative Republicans). But it illustrates the kinds of problems that need tackling as the federal government is moving toward approval of two new trade pacts that could open up plenty of new opportunities in trade expansion for smaller American companies.

What do you think? Comment on this page or write me at Director@SBFI.org.

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Atlanta Fed’s President Lockhart Predicts Rising Rates

By Charles H. Green

An interview with Atlanta Federal Reserve President Dennis Lockhart appeared in the New York Times’ Upshot column this week, and provides plenty of fodder to read through from one of the ‘centralist’ on the Fed’s Board of Governors. His expectation: interest rates are likely to be raised by the September meeting of the Fed’s Open Market Committee (FOMC).

Lockhart has been at the helm of the Atlanta Fed for nine years, and from personal

Photo: Courtesy of Reuters.com

Photo: Courtesy of Reuters.com

observation, he seems to have settled into a comfortable seat firmly in the middle of the Board, sliding there from a more perceivably hawkish position at the beginning of his tenure.

He’s a very smart banker: admittedly, while asking him questions at a couple of public events in the early days of his administration, I tried to get his current views on interest rates at the time (a Fed president no-no) with a seemingly clever, indirect line of inquiry. In front of a probably less-sophisticated financial audience, he demonstrated to me why he’s sits as a Fed president and I’m just writing about him.

Here are the highlights of the NYT interview, edited for brevity, with my own interpretive “Fed speak” meaning suggested in brackets following each answer:

Q. Signs appear to indicate a slower growth rate at the beginning of 2015, despite your predictions to the contrary. Are you reconsidering?

A. My base case view is that we’ll see a rebound in the second and third quarter and beyond and that we’ll stay on the basic track. And that is a 2.5 percent to 3 percent growth rate with continuing improvement on the employment front, and gradual rise in inflation toward the 2 percent target.

[CHG-Fed Speak: Just wait.]

Q. Does the current confusion seem greater than normal?

A. When you combine the decision that I genuinely believe that we will make with the ambiguity, it is not as comfortable a decision-making environment as one would prefer. Maybe you never have a totally comfortable decision-making environment. I’m sure that’s the case. We’ve had ambiguity in periods before — quite a bit of it over the last several years — but we were also not facing what I would call a historic decision to go from one era to another era.

[CHG-Fed Speak: We’ve always made decisions in real time on data that’s not absolute for several months afterwards, but I admit, this time it’s really important.]

Q. You describe the first rate hike as historic, but you’ve argued that people are overly focused on it?

A. Too much can be made of the liftoff decision itself because the really important factor is what’s going to be the interest rate environment for the foreseeable future and to what extent is it going to remain accommodative, which I believe it will. That’s more important to the real economy than the exact date of liftoff.

[CHG-Fed Speak: Raising rates is not the key here–what happens after rates rise is what we are focused on.]

Q. You mentioned the possibility of rates rising at one of next three meetings; are you confident rates will rise by September?

A. I wouldn’t say I’m 100 percent confident. I noted that Stan Fischer said, “This year.” So for me to say June-July-September full confidence is probably overstating it, but I think it’s quite likely. And if we were to go beyond September, it would be because we were really disappointed in the stream of data that come in.

[CHG-Fed Speak: It’s they don’t rise by September, the economy has taken a bypass that we didn’t anticipate.]

Q. Does that mean you’re confident that rates will rise by end of year?

A. I think it’s highly likely this year. If we reverted to a decision point after the end of the year, it would probably reflect either a shock to the economy that really changed the trajectory of the economy or we would have been misreading something pretty seriously.

[CHG-Fed Speak: Like I said, it will mean our analytics are upside down and the economy’s drooping gain.]

There’s plenty more to read at NYTimes.com.

What do you think? Comment on this page or write me at Director@SBFI.org.

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Present & Past SBA Administrators Endorse Trade Pacts

By Charles H. Green

In an advocacy action I’ve never witnessed–that being a bipartisan effort on behalf of small Main Street businesses–the U.S. Small Business Administration’s sitting Administrator joined former Administrators Karen Mills (2009-2013), Steve Preston (2006-2008), Hector Barreto (2001-2006) and Aida Alvarez (1997-2000) to press the public case for Congressional approval of Trade Promotion Authority (TPA) and completing the Trans Pacific Partnership (TPP) sought by President Obama.

In their words, offered through a co-authored opinion published by Huffington Post, these approvals would constitute a significant victory for America’s small Export Financebusinesses. How? By expanding domestic jobs and economic activity to meet the demand for superior American goods abroad.

Did you know that only about 300,000 American companies (out of 28 million) account for the nation’s exports. But even with that seemingly low count, exports are tied to one out of every five American jobs, which generally pay about 20 percent better than others by the way.

The Administrators argue that passing new trade agreements is critical to smaller exporters without offshore affiliates to help them overcome trade barriers and develop market access. Trade promotion opens doors for small businesses that otherwise usually remain closed. And in the TPP, for the first time there is a specific chapter dedicated to growing small business exports.

Why does this matter to commercial lenders?

According to the National Small Business Association’s 2013 Exporting Survey, more than 85 percent of respondents said their company benefited from free trade agreements. But more to the point, nearly one-half of all American exports go to the 20 nation partners with whom there is a negotiated trade agreement. In 2014, businesses in 28 states scored record-high export volumes to these 20 countries.

Since 2009, American exports have grown more rapidly to U.S.  trade agreement partners (64 percent) than countries with which there are no such agreements (45 percent).

Commercial lenders finance business and export growth increases business. And it’s that kind of new market growth that creates a corresponding need for more buildings, equipment, vehicles and working capital, which in turn will have to be financed by a commercial lender.

It’s simple: all domestic boats are lifted by the rising tide of export growth.

Read more at HuffingtonPost.com.

What do you think? Comment on this page or write me at Director@SBFI.org.

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Lendio Raises Additional Capital Financing

By Charles H. Green

Lendio, a small business lending marketplace, announced that the company raised a new $20.5 million round of funding led by Napier Park’s Financial Partners Group. Other investors included Blumberg Capital, North Hill Ventures, Pivot Investment Partners and earlier investors Tribeca Venture Partners, Runa Capital and Highway 12 Ventures. The company will use the funding to continue building out new features on its website and hiring more staff.

Lendio’s technology helps small business owner search for and qualify financing by Lendiogathering critical demographic and financial information about the business and its owners, and then linking their  application profiles with appropriate lenders seeking to find borrowers meeting target parameters. In February, the company announced a partnership with Staples to give Lendio access to Staples’ customers who need financing products.

As part of the latest financing deal, Lendio elected Dan Kittredge, managing director at Napier Park, and Chris Gottschalk, principal at Blumberg Capital, to their board of directors.

‘Marketplace’ lending refers to online service providers who offer application screening, financing advisement, or loans to small companies through technology platforms that serve to connect borrowing applications to lenders in search of new loan applications. It has become a particularly attractive sector for investors as traditional lending to small businesses continues to decline.

According to Accenture, global investment in financial technology more than tripled between 2008 and 2013. Lendio’s funding news follows the recent IPOs of marketplace lending platforms Lending Club and OnDeck Capital.

“Lendio has become the go-to hub for small business owners to obtain the financing they need to grow and thrive. Our focus is to provide three essential benefits to the business owner — offer a wide variety of loan options, speed up the process and reduce the time and effort it requires to get funded and provide a white-glove trusted experience,” says Brock Blake, Lendio’s founder and CEO. “Because we have served hundreds of thousands of business owners, we’ve been able to scale our business and improve the lending experience through an easy-to-use online matching platform, advanced machine learning and lender integrations. ”

Read more information at Lendio.com.

What do you think? Comment on this page or write me at Director@SBFI.org.

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Goldman Sachs Reports on Innovative Marketplace Lending

By Charles H. Green

A recent report issued by Goldman Sachs Equity Research, titled ‘The Future of Finance: The Rise of the New Shadow Bank,’ written by analysts Ryan Nash and Eric Beardsley describes their impressions of the ongoing changes in the banking industry.

The report points out that in the aftermath of the financial crisis, several new financial Goldman Sachsregulations have led contributed to an evolving competitive landscape in commercial finance. While stricter capital requirements have meant a reduction in credit availability in some sectors, scrutiny of high-risk lending has resulted in many banks lowering their commercial activities.

Loans to non-investment grade firms and new rules regarding the consumer market have led to higher credit costs for many borrowers, opening the rise and opportunity for alternative lenders to emerge. According to GS, these regulatory changes are a major reason that new shadow banks are being created and why many traditional borrowers and private equity firms are now becoming lenders.

The report highlights that the combination of rising big data analytics and new, inventive distribution channels are permitting technology startups to introduce new business finance models that are disruptive to traditional banks, especially in the consumer lending sector.

These new lending firms have lower cost bases than most regulated banks, meaning they can offer loans at lower interest rates.

Although still relatively small, these new lenders command a large marketshare and represents the evolution of the “shadow banking” market that stumbled following the financial crisis, but presently is growing rapidly. They note that these new technology platforms are also “growing the market” in some market areas that were historically underserved by traditional banks, i.e. those businesses that banks refused to serve.

The report identifies six areas where this shadow banking sector might divert profits of traditional banks. “We see the largest risk of disintermediation by non-traditional players in: 1) consumer lending, 2) small business lending, 3) leveraged lending (i.e., loans to non-investment grade businesses), 4) mortgage banking (both origination and servicing), 5) commercial real estate and 6) student lending.

Shadow banks are typically not subject to the same regulatory oversight as traditional banks. Though large portions of the broader shadow banking sector (especially mortgage-related) have been winnowed out since the Great Recession, several new types of shadow banking have emerged and some existing shadow lenders have seen major growth due to a slew of regulatory changes for banks.

The GS analysts highlight two major regulatory reforms: the Dodd-Frank Wall Street Reform and Consumer Protection Act passed in 2010 after the financial crisis, and the continually evolving bank capital standards (Basel III). These regulatory changes have lowered margins on some bank products, which obviously creates an opportunity for new entrants.

What do you think? Comment on this page or write me at Director@SBFI.org.

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Fed Signals Set Stage, But Not Date for Rate Increase

By Charles H. Green

This week the Federal Reserve signaled that it would consider raising its benchmark interest rate as early as its June meeting, which would be the first rate increase since the Great Recession. But such an increase is not certain–the central bank emphasized that it might still delay the decision until later this year.

The Fed’s announcement came after the scheduled meeting of the Federal Open Market U.S. Dollar signCommittee (FOMC), its principal policy-making committee, and moved the bank closer to the verge of ending an unprecedented six-year period in which short-term interest rates were held near zero. These historically low interest rates were the primary monetary tool used to combat the second worst economic recession in U.S. history and to stimulate the economy’s recovery following a financial crisis in 2008.

The rhetorical move toward higher rates reflects the Fed’s optimism that the economy no longer needs quite as much help from the central bank, but at a news conference following the meeting, Chair Janet Yellen made it clear that the ‘option’ to increase rates did not mean they would.  “Just because we removed the word ‘patient’ from the statement doesn’t mean we are going to be impatient,” said Ms. Yellen.

Clearly, Ms. Yellen was exerting her priorities on the bank’s policy, which she has led for just over one year, and in the process clarifying that she will not be boxed in. Her message seemed to say that the Fed has no intention of removing monetary support until they are clearly convinced that economic growth will continue without low rates.

A strengthening U.S. dollar and recent falling oil prices may slow expectations for future inflation, and if so, the Fed will likely hold off from raising rates. Couple that with wages and other job market indicators, of which a lack of progress could also slow the march toward moving rates higher.

What does this mean for commercial lenders?

But, if the job market recovers keeps climbing as in recent month and indicators become clearer that inflation is likely to move upward toward two percent, Ms. Yellen is likely positioning that she does not intend to be held back by “patient” language. “This change does not necessarily mean that an increase will occur in June,” Ms. Yellen said, “though we cannot rule that out.

Many commercial lenders may have been saved by the lower rates during the worst years of the crisis/recession, given the difficulty that so many Main Street companies faced making ends meet. While the rate drops at the end of 2007 and across 2008 quick took away interest income and rate margins at many banks, it softened the economic effects of borrowers not being able to repay their loans. And as importantly, lower rates helped many small companies qualify for loans during the sluggish recovery.

Rising rates have been on the mind of most lenders for some time, and as a precaution, new loan requests are more closely tested for the shock expected that will cause variable rate loans to need better cash flow to meet. One chief benefit during this lull period leading to the eventual increases is the opportunity to sell clients on interest rate hedges, that permit lenders to offer fixed rates to borrowers, while hedging on variable returns for the bank.

Meanwhile, key an eye on those clients who are barely meeting payments today–they may become your next workouts as soon as rates begin to tick northward.

What do you think? Comment on this page or write me at Director@SBFI.org.

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Strengthening Dollar Means Headwinds for Small Business

By Charles H. Green

The U.S. dollar is having a banner year and overall is up about 20% in value against the bread basket of other global currencies since first quarter 2014. But even more relevant, it has gained almost 30 percent against the Euro, currency of America’s most common trade competitor, the European Union (EU).

Exactly what does that mean? In February 2014 while in Paris to celebrate my wife’s Weaker Eurobirthday, the exchange for Euros was 1.52, meaning it cost $1.52 to buy one Euro. When we returned to Europe for the year-end holidays in Rome, one Euro cost $1.32. This morning the Google currency converter says that a Euro can be picked up for $1.06.

So if my wife had purchased up that Chanel handbag she was swooning over in Paris last February for €2.000, it would have cost $3,040. Today, only 13 months later, it would only cost $2,120. [Hint: I’m still not in favor of her buying it].

These changes all bode well for American tourists looking to buy fine Italian leather, French wines, Swiss watches and Belgian chocolates–but not so good for American small businesses.

A strong dollar creates a negative scenario for small businesses because it makes American goods and services more costly compared to the goods and services offered by global competitors. Hence, when the dollar is strong, it becomes more difficult for U.S. companies to export, and in these current conditions, particularly harder to compete with European markets.

And there is a double whammy effect: Imports become more attractive because they are less expensive relative to goods and services sold by American companies. Essentially, American buyers’ dollars go further when they buy foreign products and services.

Why should commercial lenders pay attention?

Looking back to the financial crisis and the Great Recession, remember that the federal government’s emphasis on exports led the modest, but steady growth of the American economy to pull out of its doldrums. These efforts were aided by cheap interest rates, coordinated by the Federal Reserve’s monetary policy and quantitative easing (QE). The latter led to some temporary stumbling of the dollar against other major currencies, and the administration’s political opponents instantly started howling about “debasing” the dollar.

That criticism was as ridiculous as it was shortsighted, since a weaker dollar supported efforts to boost revenues in foreign markets to support GDP growth and revival. And, fifty-nine months of continuous employment growth is hard to argue with.

The reversal of those conditions and strengthening of the dollars comes after QE has ended, but more decidedly due to the EU’s own self-strangulation with austerity policies forced on several debtor nations, intended to ensure that German banks collect all of the bad loans they extended in the years leading to the crisis.

The equity markets have fallen recently, partially due to fears that the strong dollar will lead to lower earnings for U.S. industries. The same analysts are concerned that the nation’s dropping unemployment rate will lead the Fed to raise interest rates in the coming months, which in turn could exacerbate problems by strengthening the dollar further.

For small businesses, higher interest rates will mean a higher expense to borrow in order to secure funding for growth and expansion. With increased competitiveness of foreign products, an interest rate increase might carry serious implications for smaller companies, and slow the U.S. economic rebound that seems to have finally found its footing.

What do you think? Comment on this page or write me at Director@SBFI.org.

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For Now, It’s All About Oil

By Charles H. Green

That’s what the Director the Economic Forecasting Center at Georgia State University recently told an audience gathered for the first quarter economic forecast presented by the Robinson College of Business. Rajeev Dhawan’s discussion centered on the economic implications of the current price of a barrel of oil, which has fallen more than 50 percent in the last six months.

And while this drop will deliver some breathing room in the American economy in 2015, Driphe cautioned that, “We remain a major energy importer and will benefit from lower oil prices but in a somewhat non-traditional way.”

And what does he mean by non-traditional? Although the U.S. stands to benefit from lower gas prices, Dhawan doesn’t expect oil prices to be this low forever. In fact, he predicts that they will rise later this year as supply is cut back. Thus, consumers are treating this retreat like a temporary tax cut.

“People are rational economic agents,” he said. “They will splurge some on discretionary spending (eating out, for example), but otherwise will hoard and channel the savings towards a down payment on a home or other big-ticket items, like cars.”

He points to retail reports that reflect weak growth rates in discretionary spending, yet a rising trend for automobile sales, which is expected to continue through 2016.

Dhawan’s 2015 forecast is not all good. Lower oil prices have negatively impacted domestic investment, which rose only by 1.9 percent in the fourth quarter of 2014. “The drop was concentrated in the industrial equipment category that serves shale gas and other energy producers. They now are doing outright layoffs and cutting back on capital expenditures,” Dhawan said.

Exports also are trending weaker, which is expected to continue until China ramps up production, which is anticipated later in 2016, and the Eurozone corrects its present challenges, primarily a battle against deflation.

Dhawan anticipates oil will level off around $60/barrel by early 2016. However, the Federal Reserve will gingerly start raising rates this fall as job growth continues due to rising domestic demand. It can even pause in mid-2016 to gauge the economic impact of its tightening process.

In the meantime, low yields on treasuries due to capital fleeing Russia and the European Central Bank embarking on its own version of quantitative easing will boost interest sensitive spending in the coming quarters. Dhawan does not expect low oil prices to have much of an impact on underlying growth potential of the economy. “I just don’t see any reasonable instrument that can boost the potential GDP growth rate to 3.0 percent. Oil is a big negative on the way up, but not much of a help when it drops.”

What do you think? Comment on this page or write me at Director@SBFI.org.

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