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February 27 from CNN Money Small Business
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It’s time to put my “outspoken” hat on again after reading about the hoopla going on at the National Zoo…er, make that House Small Business Committee. It seems that the SBA Administrator appeared before them this week to get grilled about the proposed FY 2016 SBA budget, which is pending before the committee.
Where to start? Lest you think this is a one-sided criticism, let me reassure you I have plenty of blather for both sides of the cell block.
Let’s start by reading the headlines written Kent Hoover, Washington Bureau chief for the Business Journals, who asks “Is SBA helping the rich get richer and leaving poor business owners behind?” Please.
That headline is borne of short-sighted bad mouthing by Rep. Nydia Velazquez (D-NY), the ranking Democrat, about the agency’s decision to to eliminate the Program for Investment in Microentrepreneurs (PRIME), which funds organizations that provide training and technical assistance to low-income business owners who employ five or fewer workers. In order words, a few micro lender grants that serve a relatively small number of prospective business owners.
Contreras-Sweet said she’s “simpatico” with Velazquez’s concern for serving underserved markets. In recent months, SBA has kicked-off efforts to work with community colleges to encourage millennials from minority groups to start businesses. Plus, the SBA has entered MOUs with two credit union associations on initiatives to boost availability to more SBA loans of less than $50,000.
Then enter the committee chair, Rep. Steve Chabot (R-Ohio) who quotes the committee’s official report on the budget, which noted they are “strongly concerned about the SBA’s use of its pilot program authority,” created to provide the agency with some measure of flexibility. “The SBA, however, abuses this authority.”
As reported by J.D. Harrison, for the Washington Post, Chabot specifically pointed to new entrepreneurial outreach programs, including the grants for early-stage business incubators, and the new online lender-to-borrower matching tool as examples of initiatives that were not approved by Congress and appear to duplicate programs run by other departments or non-governmental groups.
You have to admire Contreras-Sweet, who pushed back against the criticism. She pointed out that the agency has asked for permission to expand initiatives that help meet the needs of underserved entrepreneur populations. She also reminded the committee that her team is “doing more with less,” emphasizing that the SBA’s $860 million request for next year is about three percent lower than this year’s budget.
My opinion? The SBA has moved light years from the sleepy Podunk watering ground that it was 20 years ago, bloated with district offices that read the same SOP 64 different ways, and was often led by a defeated Senatorial candidate in search of a comeback somewhere else.
The House committee is criticizing them simultaneously for lowering funding to train entrepreneurs with a much lower ‘upside’ of success, while adding dollars to fund training for more advanced entrepreneurs who have a higher probability to succeed.
SBA has eclipsed many other federal departments–much greater in size–in meeting the needs of its stakeholders, while leveraging the rising engagement of the banking industry to deliver funding to entrepreneurs of little interest to many in the lending community. The results are more borrowers of all sizes, more training provided nationwide, and $28 billion in funding for the small business sector.
The House Small Business Committee, in my humble judgment, exemplifies exactly what we all hate about politicians. They are against any idea, if it wasn’t their idea.
Your comments welcome at Director@SBFI.org.
According to Claude Handley, as published in the American Banker, small-business lending is in need of an overhaul at most community banks. He correctly points out that the lending process at most of these institutions tends to still be paper-intensive, cumbersome and inefficient for both borrowers and bank personnel.
Handley points out that prospective borrowers are required to provide far more documentation than is actually necessary for prudent underwriting. Most banks employ the same application and underwriting checklist for all loans, regardless of the size or complexity of the request, or the characteristics of the borrower.
But, the simple economics of small-dollar loans are both the largest barrier to solving the problem and in fact the majority of the problem. Management of small business borrowers needs to be streamlined and highly automated, but as important, such improvements cannot come at the expense of sacrificing customer service.
This column has advocated for lenders to explore a large array of technology platforms already on the market that can simplify the loan application-underwriting-approval-and boarding process, but that will require some time and expense to convert to, and many smaller institutions are hesitant to let go of a good thing, seeing how their results are reflecting a much rosier picture.
What rosy picture?
According to the FDIC’s recent quarterly profile, community bank profitability was up on average 28 percent last year, with more loans funded to small businesses and the list of problem banks sinking to its lowest level since 2009. And these statistics come in the face of a rising tide of online, innovative lenders who are scratching market share away from banks in several product lines from consumer debt to SME working capital loans.
But that’s today, and we all know tomorrow is another story. Handley notes that ‘dissatisfaction with credit services’ is among the main factors that lead small businesses to switch their primary banking relationships, according to fourth-quarter 2014 survey data from Barlow Research Associates.
The survey also found that the number of days banks spend responding to a credit request is longer than what small business customers expect.
Last year’s results provide no assurance of the results any bank can expect next year. Best advice-keep improving your process or you won’t have customer complaints to deal with, or customers for that matter.
Read more at American Banker
The Federal Deposit Insurance Corporation (FDIC) released their Quarterly Banking Profile recently, that reflected a positive report on the commercial banking sector. Banks and savings institutions insured by FDIC reported aggregate net income of $36.9 billion in the fourth quarter of 2014, down $2.9 billion (7.3 percent) from earnings of $39.8 billion that the industry reported a year earlier.
However, they quickly note that the earnings decline was due to a $4.4 billion increase in litigation expenses at a few large banks. More than sixty-one percent of the 6,509 insured institutions reporting had year-over-year growth in quarterly earnings. The unprofitable banks in the fourth quarter fell to 9.4 percent from 12.7 percent a year earlier.
While there was a continued decline in mortgage-related income, most banks reported higher operating revenues and improved earnings from the previous year. In addition, the pace of bank lending rose, balance sheet quality improved, and the number of banks classified as ‘Problem’ institutions dipped to its lowest level since 2009.
FDIC Chairman Gruenberg said, “Community banks performed especially well during the quarter. Their earnings were up 28 percent from the previous year, their net interest margin and rate of loan growth were appreciably higher than the industry, and they increased their small loans to businesses.”
The report also noted that the industry’s full-year ROA tallied up to 1.01 percent, the third consecutive year that this metric exceeded 1 percent. As a group, nearly two-thirds of the nation’s banks (64 percent) enjoyed a higher net income in 2014 than in the previous year.
FDIC’s list of “problem banks” dropped for the 15th consecutive quarter, declining from 329 to 291 in the fourth quarter. That’s the lowest since the end of 2008, a full 67 percent below the post-crisis high of 888 at the end of the first quarter of 2011.
Read more at FDIC.
While the SBA has been leading the charge to encourage more women to consider entrepreneurship and get full access to all the resources available to their male counterparts, SBA lending to women has realized only mixed results. An analysis of gender-identified loan approvals among the two prominent SBA lending products, the 7(a) and 504 programs, reveals that lending volumes have remained mostly stagnant between fiscal years 2009-2014.
The SBA has been in the news recently pushing new resources that targeting women-owned business owners, including the SBA-sponsored Women’s Business Centers to encourage women to start companies. A separate program, “Veteran Women Igniting the Spirit of Entrepreneurship” (V-WISE) features an outreach effort aimed at women service veterans.
In fact, the most significant SBA headline involving the president recently was for passage of the National Defense Authorization Act (NDAA), signed on December 19th, which included provisions pressed by SBA Administrator Maria Contreras-Sweeet to finally begin to implement the Women-Owned Small Business (WOSB) Federal Contracting Program.
But according to SBA approval statistics, between 2009-2014, SBFI analysis reflects that SBA loans to women ranged from 23.90% to 27.89% of all dollars funded through the 7(a) and 504 loans, with corresponding loan volumes ranging from $3.6 billion to $6.3 billion.
While the FY 2014 dollar loan total was the highest recorded in these years, at $6.3 billion, that volume only reflected 27.32% of that year’s dollar volume, while the women won 30.86% of the number of loans approved. In FY 2009, women were approved for 31.89% of all SBA loans, which translated that year to $3.6 billion. In other words, while the gross dollar volume of these loans is rising, as a percentage of the number of loans approved, women entrepreneurs seem to be stuck around 30%.
What does this mean for SBA lenders?
It’s important to point out information on the SBA’s website, that women own roughly one out of every four businesses in the U.S., meaning that these figures are well in line with the relative size of their demographic relationship to the economy: 25% of business owners getting approved for 30% of SBA loans (and 27% of dollar loan volumes).
While the approval rates do seem fixed, variances up or down only within the range of about four percent of annual dollar volumes or three percent of the number of loans, SBA lenders are apparently responding to this category of loans sufficiently. But it’s also noteworthy to recognize that this demographic is growing faster than the economy’s other participants, and may represent a growth opportunity for lenders who double down on lending to women business owners.
Women are starting companies at a torrid pace, according to an analysis conducted by American Express of Census Bureau figures. Between 1997 and 2014, the number of women-owned businesses in the U.S. rose by 68 percent, compared to a 47 percent increase of all companies.
That same report concluded that women are starting an estimated 1,288 companies each day, up from 602 in 2011-12.
“Women are becoming more aware of the opportunities for entrepreneurship in their lives. It’s becoming more of an option for a career move than it ever has been in the past,” says Susan Duffy, executive director of the Center for Women’s Entrepreneurial Leadership at Babson College. “Expect the numbers of women business owners to keep rising as younger women look to famous women as their role models.”
That sounds like a good target to grow loan business for someone.
Read more at Capital Views.
Readers of this page should be familiar with the rise of innovative ‘marketplace’ funding, and as such, the term “crowdfunding” should be old news. Made prominent by peer-to-peer pioneers Prosper.com and Lending Club, these platforms originally gathered lots of small checks from individuals or “peers” to finance consumer loans for cars, schooling or even refinancing more expensive credit card debt.
The rest is history, as Lending Club issued an IPO last December with a market value totaling $8 billion, and dozens of offshoots, me-too’s and other clever ideas have emerged to capture a portion of this market or create another niche.
One fledgling company who’s working on the next big niche is New York-based Lendoor, which intends to apply the crowdfunding business model to the already most raucous sector of American finance: small-business lending.
This company plans to introduce a platform for local businesses to borrow money from their customers and other individuals they can attract online. It’s the latest effort by a technology company to disrupt functions that traditionally are performed by banks.
The company states that their mission is to “help startups and small businesses nationwide get crowdfunded loans from friends, customers and supporters — instead of bankers — with terms that work for both sides.”
Although their game plan is promising, Lendoor’s mission is on hold, awaiting final adoption by the Securities and Exchange Commission (SEC) of rules pertaining to small investors, which were provided for in the JOBS Act of 2012.
Crowdfunding for business purposes really took off after Congress passed the JOBS Act, lifting a ban on startups publicly asking for investors capital. But the entire provisions of the act have not yet taken effect due to the deliberative process being conducted by the SEC to finalize these rules.
Presently, only “accredited investors,” those with a minimum of a $1 million net worth (excluding their primary residence) or annual income over $200,000, are eligible to participate in equity crowdfunding deals.
The SEC is reviewing Title III of the JOBS Act, which would open the universe of potential investors in crowdfunding to anyone who is able to risk money in the market.
Meanwhile, Lendoor is standing by ready.
Read more at Lendoor.
Whether it’s a case of ‘keeping your friends close–but your enemies closer’–or maybe the recognition of the old axiom, ‘if you can’t beat ‘em, join ‘em,’ but there seems to be a lot of movement from the traditional banking industry toward working cooperatively with rising upstarts in the innovative marketplace funding sector.
Familiar names including Citibank, American Express, SunTrust, Wells Fargo, and even the mammoth credit card payment processor Master Card, are doing deals through a variety of arrangements with the leading–as well as some literal start-up–financing and payment companies that have emerged since the financial crisis. These novel lending companies have created disruptive business models that are scaling faster than anyone predicted, and are more clearly seen as encroaching on growing swaths of market share from banks across a number of credit and payment products.
“We are open to any and all conversations,” Garry Lyons, the chief innovation officer in Dublin for MasterCard, told the NY Times. Although “disruption is a potential threat to established companies,” he added, “we’re open to working with new emerging companies” to serve customers’ needs. He said MasterCard and its customers could both benefit from “access to external thinking.”
In late 2014, Wells Fargo launched a business accelerator to support enterprises working on tools for the financial services industry, while Citigroup is funding venture investments in companies with the potential to produce disruptive transformation in financial products and services.
American Express has gone so far as to open a technology office in Silicon Valley focusing on mobile payments, cloud computing and big data.
What does this mean for commercial lenders?
This new found love of innovation among the venerable large banks may puzzle many observers, who are more accustomed to the growth strategies exhibited over the past fifteen years, primarily driven by the expansion of leverage and bank consolidation. But faced with a rapidly changing marketplace, it’s a safe bet to assume that many are putting up capital to stay in the game–whatever that game turns out to be.
Today, consumers and business owners seem to be getting new financing options every month. While the competition is fierce, profits are scarce due to the high cost of funding associated with these operations. Enter the banking industry as a partner, with many advantages, not the least of which is cheap, reliable funding.
Many lenders can expect to wake up someday in the near future and learn that one of these dazzling new disruptive financing alternatives is on their list to sell that day.
Just as the economic news keeps getting better, jobs are growing at the fastest rate in a decade, wages are finally starting to unthaw, and the Federal Reserve is getting ready to boost interest rates, the respected Kauffman Foundation drops a bomb: entrepreneurship is officially in decline.
According to an account by the Washington Post, new research shows that the country’s rate of new business creation, which peaked about a decade ago, plunged more than 30 percent during the economic collapse and has been slow to bounce back following the recession. And that’s despite the fact that, over the last few years, the portion of the U.S. population between the ages of 25 and 55 – historically the prime years of starting a business – has been expanding, according to data compiled by the Kauffman Foundation, an entrepreneurship research organization.
The research is graphically explained by Kauffman’s in the Post through five measurements that demonstrate their conclusions:
- New business creation has only recently bounded back from decline following the financial crisis, among both the prime age (25-54) and working age (15-64) entrepreneurs.
- Since 2008, business deaths have outpaced new business startups.
- Older firms (16+ years) represent a majority of U.S. firms.
- New firms are responsible for virtually all new job creation.
- Millennials (ages 20-34) aren’t starting new businesses at the rate that Baby Boomers did. In fact, the only demographic not in decline today is in the age category from 45-54.
To offer context around their assertions, Kauffman’s report points out that as a group, Millennials have a low home ownership rate, which is a traditional source of savings and potential collateral to support starting a business. In addition, many are financially strapped these days, having left college with an impressive upper-level degree that was very expensive, and paid for with education loans.
Kauffman urged policy makers can make conditions more favorable to entrepreneurship for more Americans of all ages and backgrounds.
“Unless we see more entrepreneurship, the kind of economic growth we’re seeing now will not continue,” said Mark Zandi, chief economist at Moody’s Analytics.
One of the perennial challenges in commercial lending–for lenders and borrowers–is getting the right loan application in front of the right lender. In the lending community, we know how credit organizations break down between the various financing products they offer, such as C&I loans vs. CRE lending, or ABL vs. government guaranteed lenders, etc. But many prospective borrowers know one word for all of them: bank.
Collectively, lenders haven’t done a good job of educating the marketplace about the different financing products available and how to clearly identify the range of companies available to fund their requests. The results are thousands of meetings arranged annually with mismatched borrowing prospects and lending sources, wasting time and effort. And most lenders coming out of these meetings probably miss the chance to offer a sufficient explanation as to what–and who–is needed and why.
The site employs a short list of questions to qualify the kind of funding needed and provides a simple solution for time-constrained business-owners to find the right funder to contact, without requiring any personal contact information to use the site.
The business represents a unique collaboration of several market-leaders for the primary forms of alternative business funding for small business finance. These lenders represent funding for short to long-term loans, debt, equity; even retirement account self-investing management providers are included, and they expect to grow the list of participating lenders.
The loan applicant’s experience is visual and to the point: favorable opportunities are represented with a “green light,” while dead-ends, based on applicant responses, are represented with a “red light.” “Yellow lights” mean more information is needed to clarify an opportunity.
It’s a great tool–check it out and look at the questions for yourself to get a sense of how they sort loan applicants into specific, more targeted funding streams. We’ve got some catching up to do on this side to provide such an effective, collaborative tool to search the small business marketplace.
Read more at AlternativeBusinessFunding.
So your bank survived the financial crisis, maybe with some borrowed money or maybe your own. Your credit box got dialed in and you doubled down on managing workouts to maximize recoveries and lower loan losses as best as you could. After a few false starts, the economy finally moved into recovery last year and now its time to make some money, right?
For the first time it seems in a decade, you finally convince your CCO to make a credit policy exception and approve a loan that’s just outside the comfort zone–but in a small, marginal way. And you learned that a peer was given the same consideration for another loan to a coveted client prospect.
And what happened? The sky did not fall, the earth did not quake, and the bank’s assets weren’t seized by the regulators.
So you were back a week later asking for one more small policy exception, that really didn’t affect the debt repayment, just a side issue of little consequence really. And then another one…and another…until your bank was in full swing ‘risk creep.’
Risk creep happens to commercial lending when you get bored with the status quo of the business you have and start looking on the other side of the fence (where the grass is always greener). Or you seemingly can’t compete with anyone else because your credit policy seems to be unreasonably tight, and you have to walk away from almost every deal you work on.
So, you slowly move just a toe over into a riskier terrain. After all, any credit by its nature carries the risk of non-payment, so what’s just a little more flexibility?
When everything goes well with that change in terrain, everyone concludes that things must be safe. So we push the envelope at little further. Then some more. And then, we recognize that we’ve got this risk thing down pat, and it’s time to ramp up the game.
In some banks, the seeds of future failure get sown this way, as credit risk creeps in incrementally. It’s so subtle, that we rarely notice it. Talk to some bankers who lived through a failed credit operation and you hear the same stories:
“I made a number of mistakes”
“We ignored some obvious red flags that all should have been clear signs to pull back from certain loans.”
Many bankers I’ve spoken to look back on their mistakes and see all the obvious warning signs, so obvious that they openly admit how dumb it was to miss them.
The cause? Risk creep, that starts with a plan offering a clear margin of safety, but then slowly, the collective sense it to take just a bit more risk. No one calls it that, and most of the time they don’t even recognize they’re doing it.
As things go well, the perception of risk seems to go down. Lenders start to feel safe and as a result take one small step into territory that was previously labeled out of bounds. And the process repeats. Take a small risk. Things go well. Increase risk. Repeat until failure.
As business development starts heating up in this new year, it’s a great time to examine your credit policy and recent portfolio additions for signs of risk creep. The remedy for risk creep happens to be what some would argue is the most important word in the English language: remember.
Just remember what it was like to watch as your loan losses rose by 100 percent (or more) in 2008. Or what it was like to decline a loan to your best client because of your banks’ balance sheet, not theirs.
Then take a close look at where your bank is in terms of risk creep and remember: things change.
There’s an axiom in business financing that reflects an age-old correlation in everyone’s data: the ability of a small business owner to hire workers and their ability to get financing.
According to the 2014 Year-End Economic Report compiled by the National Small
Business Association, even though the number of companies reporting to be affected by the credit crunch continues to drop—down to 61 percent from 66 percent just six months ago—one-third of small firms still struggle to get the financing they need.
This new layer of capital access frustration comes juxtaposed with the survey’s finding of a 14-percent jump in business owners who project economic expansion in the year ahead.
When asked what kind of financing their company used, there was a notable jump among small firms that rely both on credit cards and earnings of the business. These two are the most quickly accessed forms of financing which could indicate newer businesses seeking financing as well as new opportunities for existing businesses that may not have the track record required by other financing tools.
There are a handful of other contributing factors to the increase in credit card usage as well, including: a five-percent increase in the number of firms who reported winning an increase in their line of credit (or credit card) in the last six months; a drop among small companies who say their credit card terms had worsened in the past six months; and the average interest rate on credit cards dropped from 13.94 percent in July 2014 to 13.05 percent in December.
What does this mean for commercial lenders?
NSBA’s survey found that the absence of capital is impacting these businesses negatively, hindering their ability to grow revenues or provide sufficient increase inventory to meet sales demand they have access to reach.
All this against the backdrop of conflicting signals from the Federal Reserve seeing small business lending tightening as the economy is expanding on all metrics.
With business owner confidence growing, and perhaps the strongest indication of their willingness to hire new employees since the financial crisis, this moment may be a crucial time for commercial lenders to step up to the demand. Whether that means more aggressive marketing, or loosing a few strings around the proverbial credit purse, depends on the organization. But now more than ever since 2008, the market is heating up with loan demand.
For government guaranteed lenders, SBA has shifted capital access expansion efforts into high gear. With several initiatives to waive the “$” flag in more sectors (including credit unions, veterans groups and the LGTB community), the SBA is trying to drum more supply and demand for use of its loan programs. The 2014 SOP modifications to lender/borrower credit standards for loans <$350,000 should help lenders scale access into this sector, and the recently announced LINC portal is geared to connect borrowers directly to lenders.
Read more at NSBA.