Category Archives: SBA

SBA

SBA 7(a) Authorization Boost Clears Senate Committee

By Charles H. Green

The U.S. Small Business Administration’s flagship 7(a) guaranteed loan program is doing very well this year, and as reported here recently, is on track to break all previous dollar volumes in this fiscal calendar. Through the end of March, the 7(a) program loan approvals totaled just south of $10 billion for the first six months of FY 2015 (see chart). At this pace, the program will outstrip its funding authorization before September 30, as happened in FY 2014.

The Senate has already begun to act thanks to a funding measure introduced by  Sen. Gary Introduction to SBA 7(a) Loan Guaranty ProgramPeters (R-MI), titled the Small Business Lending Reauthorization Act of 2015, which would increase the 7(a) program’s authorization level to $20.5 billion for FY2015 and $23.5 billion for FY2016. In program is presently authorized for $18.75 billion. This bill’s co-sponsors include Senator Jim Risch (R-ID) and Cory Gardner (R-CO) and  Jeanne Shaheen (D-NH). This bill cleared the Senate Small Business and Entrepreneurship Committee this past week.

Peters’ legislation is timely for the agency and participating lenders, and if approved by the full Congress and president, will allow the program to meet the industry’s projected loan demand without having to ask for an emergency increase, as was required in September, 2014. Since the 7(a) program is funded entirely through fees paid by borrowers and participating SBA lenders, the increase of this authorization means there is no subsequent cost to taxpayers.

As reported by the Business Journal, Tony Wilkinson, president of the National Association of Government Guaranteed Lenders (NAGGL) said, “This high loan volume is an indication of a growing small business economy that still cannot find long-term financing from today’s conventional market and so must turn to the SBA 7(a) loan program.

Wilkinson told the Journal that the committee’s vote to raise the loan authorization level was “an important first step towards ensuring that small businesses can continue to receive these loans.”

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

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U.S. Ranking Slips for ‘Best Place to Do Business’

Part 1 in Series

by Ravinder Kapur

The annual study, “Doing Business 2015,” conducted by the World Bank has found that the United States ranks 46th (41st in 2014) among 189 countries for starting a new business, 41st (41st in 2014 ) for enforcing contracts and 16th (15th in 2014) for trading across borders. These three criteria, along with seven others (to be analysed in subsequent articles), have resulted in the overall position slipping to the 7th place from a more respectable 4th in 2014.

The abysmal showing at 46th position for ease of starting a new business is a result of the Doing Business in 2015measurement of four criteria:

  • Number of procedures required to start a new businesses;
  • Time required to complete these procedures;
  • Cost to be incurred;
  • Minimum capital requirement;

The benchmarks for these four parameters are set by Canada and New Zealand (number of procedures), New Zealand (time required), Slovenia (cost), and Australia and Colombia (minimum capital).

When a country’s economy does not grow at a fast enough pace or if the employment numbers are not satisfactory, the usual response is to look for a fiscal stimulus or for the central bank to increase liquidity. The slow economic growth may also be attributed to an overly generous welfare program or its opposite. However, the ‘Doing Business’ survey of the World Bank takes a view that in addition to these factors, it’s important to consider the working of the “nuts and bolts” of the economy.

As explained in the survey, “The laws that determine how easily a business can be started and closed, the efficiency with which contracts are enforced, the rules of administration pertaining to a variety of activities— such as getting permits for electricity and doing the paperwork for exports and imports—are all examples of the nuts and bolts that are rarely visible and in the limelight but play a critical role.”

The ‘enforcing of contracts’ criteria measured in the study is composed of the procedures required, the time taken and the cost to be incurred in fulfilling this basic business requirement. Here, the United States is at a position of number 41, reflecting the slow legal system in the country. The leader for this measure, Singapore, takes a mere 120 days on an average to enforce a contract, as against 420 days for the U.S.

Trading across borders for US businesses (16th place in the list of 189) is comparatively easier than for most countries. However, here too there is a lot of catching-up to be done with Singapore, Hong Kong and Korea, which top the list.

While the World Bank Doing Business survey may not be the final word on the ease of conducting business in the U.S., it is a useful indicator of the areas in which the country needs to improve.

Note – The ‘Doing Business’ Survey used New York and Los Angeles, and their respective market attributes, as representative of the U.S. for the purpose of contribution data for this survey.

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EX-IM Bank Free-for-All: Delta Air vs. Rest of the World

By Charles H. Green

The clock continues clicking down to the June 30 deadline when the charter for the Export-Import Bank expires, and the fight to save–or kill–it has gotten even more heated, as this saga continues. The normally obscure Export-Import Bank, whose main job is to help American businesses sell their goods and services abroad, will cease to exist on July 1 if Congress does not renew its authorization.

Enter whining Atlanta mega-airline Delta, who had been waging a court battle against EX-Export-Import-BankIM Bank for years, claiming that EX-IM loans to Boeing enabled foreign air carriers to be more competitive at their expense. Delta lost. Delta’s emergence from bankrupcy and subsequent merger with Northwest Airlines has rendered them to be a more cut-throat, loathsome service provider, whose hometown popularity is bleeding profusely.

According to the New York Times, while the public faces of the EX-IM Bank battle may be supporters like mom-and-pop exporting companies walking Capitol Hill hallways, or opponents like ideological conservative spear carriers Club for Growth and the Heritage Foundation,  the behind-the-scenes slugfest is really between two industrial heavyweights: Boeing and Delta.

Who is Boeing’s wingman?

Both have narrower, bottom-line interests in the bank and each has very deep pockets. Delta has spent nearly $10 million on lobbying since 2012, at least in part to kill the EX-IM Bank or greatly diminish loan guarantees for Boeing customers abroad, according to lobbying disclosure forms. Boeing has spent 7x that sum, surely of which plenty has been lavished on the EX-IM fight.

Of note–the U.S. Chamber of Commerce, the National Association of Manufacturers, the Aerospace Industries Association and 46 other business associations assembled their efforts to support EX-IM under the collective banner ‘Exporters for EX-IM Coalition.’ This overwhelming show of brass from the business sector reflects that everyone has Boeing’s back in this food fight, and Delta has chosen an isolated position with virtually no friends in the marketplace, save the ideological rogues.

For the opponents, all they have to do is wait out the clock, which may be accomplished by blocking or delaying critical votes in a number of places that any reauthorization legislation will be required to pass.

A Senate bill, the Export-Import Bank Reform and Reauthorization Act of 2015, was introduced in March by a fairly robust–and bipartisan–list of members including Sen. Mark Kirk [R-IL], Sen. Kelly Ayotte [R-NH], Sen. Roy Blunt [R-MO], Sen. Joe Donnelly [D-IN], Sen. Lindsey Graham [R-SC], Sen. Heidi Heitkamp [D-ND], Sen. Joe Manchin [D-WV], and Sen. Mark Warner [D-VA]. Read a copy of the Senate bill here.

That bill follows a House version introduced by Representative Stephen Fincher [R-TN]  to reauthorize the bank for five years, which of note, gathered at least 57 Republican co-sponsors.

As legislation moves through Congress, there are plenty of places for a fumble, a temporary or more difficult set-back, and for serious–and painful-arm-twisting. But the clock keeps ticking and the proponents are down to about 60 days to clear both sides of the Capitol.

Meanwhile, EX-IM Bank’s annual conference is this week in Washington and has delivered another army of 1,200 large and small business exporters, international buyers, policy makers to DC. No doubt, they will join many government policymakers to discuss global economic trends and how to get the agency charter renewed.

Through an impressive array of speakers, they’ll be able to trumpet the virtues of EX-IM financing that can’t help but resonate across town on Capitol Hill.

Who’s showing up?

IMF Managing Director Christine Lagarde
U.S. Secretary of Labor Thomas E. Perez
U.S. Secretary of Commerce Penny Pritzker
Ambassador Michael Froman, U.S. Trade Representative
National Security Advisor and Ambassador Susan E. Rice
Stephen S. Poloz, Governor, Bank of Canada
U.S. Senator Heidi Heitkamp (D-ND)
U.S. Rep. Maxine Waters (D-CA)
U.S. Rep. Frank Lucas (R-OK)
Former Virginia Governor and former U.S. Senator George Allen
Joe Kaeser, CEO of Siemens AG
Jacqueline Hinman, CEO of CH2M Hill
Borja Negro, CEO of Gamesa (North America)
James E. Rogers, Chairman of the board of Duke Energy.
Doug Oberhelman, CEO of Caterpillar Inc.
James McNerney, Jr., CEO of The Boeing Company
Steven Rattner, Chairman of Willett Advisors LLC

Sound ominous? Maybe Delta should cancel their flight, er…that is fight?

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

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CARD Act Offers No Protection to Small Business

By Ravinder Kapur

The CARD Act, which took effect in early 2010, does not extend its protection to credit cards branded for business use, even though banks consider small business owners’ personal credit reports when sanctioning limits and in case of default, holding them personally liable. This glaring anomaly is especially conspicuous when we consider that while general consumers are protected from a rate increase on their balance unless they are 60 days delinquent, there is no such protection for small business card holders.

According to the National Small Business Association, credit card financing forms the Credit Cardthird most important financing source for small businesses after business earnings and small business loans. Companies who find that their credit card rates have been hiked can theoretically transfer their balance to another bank. But with 70% of the credit card market controlled by the top 7 issuers, this solution may not be practical.

A good case in point is that at the time of the global financial crisis, card issuers repeatedly raised rates for small business and restricted access to balance transfers. This left many businesses with no option but to pay higher rates.

In a recent article in TheBlaze, Odysseas Papdimitriou, founder and CEO of Evolution Finance, said “We therefore have to ask ourselves whether we really want the backbone of our economy to be treated like second-class citizens, especially when the pre-CARD Act, anything-goes regulatory environment has already been deemed unsafe for the average person.”

Why should commercial lenders care?

The protection that should be extended to small organisations for their credit card financing would be available once and if the Small Business Credit Card Act of 2013 takes effect. While that bill continues to languish in committee, small business owners are subject to arbitrary rate hikes on their outstanding balances.

For other small business lenders, the major credit card issuers enjoyment of these more strident terms soak valuable working capital from companies that you may be financing otherwise. This kind of bleeding takes away funds that may be needed to service your debt and keep your client on plan to meet business objectives.

Papdimitriou has the following two tidbits of advice for small companies who are suffering at the hands of unregulated card issuers: “First…use personal credit cards for funding purposes and hope the corresponding loss of business provides a wake-up call to issuers. The second is to gravitate toward forward-thinking issuers like Bank of America that have proactively extended the most important components of the CARD Act to their suite of business offers.”

Considering the pivotal role played by small businesses in the economy it is imperative that suitable protection be provided to companies which use credit cards to finance their business requirements.

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Is “Secular Stagnation” Looming on the Horizon?

By Amaresh Gautam

If you follow the financial media regularly, it would have been hard to miss the term “secular stagnation,” which has been rising since former Treasury Secretary Larry Summers mentioned it in a speech before the IMF Economic Forum in November, 2013. What is it exactly? As defined  by the Financial Times, secular stagnation refers to the condition of no or negligible growth in a market-based economy.

Alarmingly, the phrase is being increasingly used by some of leading global economic Stagnationvoices. Summers painted a world where savings will be abundant, but there will be few attractive places to invest them. Ultimately, the excess capital over investment manifests in  weak demand, which results in low long-term growth rates. The central bank will typically address the problem of high savings and low investment by tweaking the inflation rate, but the inflation rate in US has already been quite low for a while. Without that economic lever to pull, the central bank may find it hard to pull the economy out of doldrums.

The term secular stagnation takes a really long-term perspective on economic activity. For example, think in terms how wealthy the current generation is compared to a few of the previous ones, and then how rich or poor the next genertion will become in comparison. The Econonist magazine analysed this situation in a November, 2014 article, which compiled the 10-year growth rate of leading global economies for a period of six decades. Their conclusion? That economic growth indeed has slowed down, which they attributed to changing demographics: the growth of older people as an increasing percentage of the population. They assert that this change is slowing global economic growth.

Can technology come to the rescue?

If this theory is indeed accurate, then we might conclude that people must work longer and harder, and perhaps maybe even more people have to go to work.  The alternative to working harder may be technological progress, assuming that some transformational companies like Google, Facebook and Amazon have forever changed the way business is to be conducted, and the pace of innovation will continue to increase. However there are economists like Robert Gordon who believe that instead of increasing, the pace of innovation is actually slowing down.

Summers suggests two ways out that the industrialized nations might resolve this condundrum. One solution is that an asset price bubble, which is supported by excessive consumer borrowing and spending, creates the semblance of a vibrant economy and soaks up the excess investment ahead of its correction. While probably effective, that would be a risky way to escape one problem (secular stagnation) while colliding with another.

A better way, Summers suggests, would be that governments borrows these extra savings and spends in ways that can lead to economic expansion.

The other side of the argument

With Summers and Gordon on the pessimistic side of this debate,former Federal Reserve chair Ben Bernarke believes that slower growth is the result of a mixture of cyclical factors that can be addressed. Bernanke, whose recent blog premier devolved into a debate with Summers and NYTimes columnist and Nobel Prize Laureate Paul Krugman.

Bernanke pointed out that unless the whole world is suffering from secular stagnation, it should not be too much of a problem, since extra savings can flow freely from countries with too much liquidity into countries where the saving rates are low. Capital outflow would weaken the exported currency, creating a higher demand for imports from other countries, which would lead to a stablization of income.

Current Fed chair Janet Yellen has also acknowledged the dangers of secular stagnation, but does not regard it as the most probable economic outlook.

What does this mean for commercial lenders?

So the big question we are left with is “will secular stagnation be a probable economic outlook?” And if so, how does that impact small businesses and commercial lending?

It’s hard enough to predict the economic trend for next few quarters, let alone the next decade. Economists are notorious for answering questions with multiple options (“but on the other hand…”). However, even if the discussion of secular stagnation turns out to be empty speculation, it can cause a lot of damage to market sentiment, those shallow, superficial emotions like fear and panic, which may run amok.

Most investment brokers love narratives like secular stagnation, because fear-inducing situations can quickly create profit-making opportunities, such as offers to sell you assets at supposedly undervalued prices.

Thus, while it’s not possible to know which economic pronosticator will eventually be correct, the rest of us might be well served to  keep a tab on the ongoing debate.

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Hoenig Proposes Regulatory Relief to 90+ Percent Banks

By Charles H. Green

During the aftermath of the financial crisis, the regulatory community largely stood together and at times endured a withering degree of criticism that they had not done their job, given the extent of the systematic breakdown following the housing crash. When there were differences, they always seemed to be when FDIC Chair Sheila Bair offered a harder line of bank criticism than the others, expressing many of the failures of the system and some of its institutions.

Another such difference bubbled to the surface in the supervisory community recently

photo courtesy of Bloomberg.com

photo courtesy of Bloomberg.com

after the Federal Reserve reported that capital at the eight largest American banks averaged 12.9 percent of assets at the end of 2014, according to their measurement, well above required regulatory minimums.

But in contrast, in a recent speech by FDIC Vice Chair Thomas Hoenig, he calculated that capital at those same banks averaged only 4.97 percent at the end of 2014. This discrepancy is due to differing views at the FDIC of the risks posed by the banks’ vast holdings of derivative contracts used for hedging and speculation, which is more closely aligned with international accounting standards.

The Fed assumes that gains and losses on derivatives generally net out, in keeping with American accounting rules and the central bank’s accords, and as a result, most derivatives do not appear as assets on banks’ balance sheets, an omission that bolsters the ratio of capital to assets. The FDIC takes exception to this generous view.

Since passage of the landmark Dodd-Frank Act in 2010, fully named, the Wall Street Reform and Consumer Protection Act, delaying, confusing and rolling back the new law has been a constant pursuit of many of the nation’s largest banking institutions. As fast as the resulting new regulations were announced or implemented, an onslaught of proposals were aired for regulatory reform by the financial industry, intended to dilute or delay any and all effects on the pre-crisis leeway the major banking houses had to the banking system that previously crashed.

Maybe the day for reform has finally arrived, as Hoenig announced a bold new proposal to scale back the regulations on a majority–more than 90 percent, in fact–of the nation’s banks, who would be largely exempted from many of the onerous reporting requirements, tangled compliance mandates and restrictive capital tabulations of Dodd-Frank.

The catch, of course, is that while the suggested relief of regulatory burdens will affect the vast majority of institutions that pose no danger of systematic risk, due to their business activities, the relative scale of risky operations or capitalization.

Hoenig has proposed some smart ways to give regulatory relief to the banks that deserve it: low-risk, traditional banks that did not cause the financial crisis. Those institutions that did contribute to the 2008 mess get no relief under the plan.

Proposed conditions

Hoenig’s proposal is based on the size, complexity and business activities of any institution to determine whether it’s eligible for the possible relief. He and his deputy Karl Reitz examined bank failure rates and looked at the institutional characteristics of banks that were able to withstand downturns.

From this exercise, Hoenig devised a criteria list for banks he felt would be safe to exempt from some regulations without posing risks to the financial system and ultimately, the taxpayers. The winners would be banks that:

  • Hold no trading assets or liabilities;
  • Have no derivative positions other than plain-vanilla interest-rate swaps and foreign exchange derivatives;
  • Hold a notional value of all derivatives exposures totals less than $3 billion;
  • Have a capital level of at least ten percent.

As for the latter, such a simple, straightforward capital ratio cannot be gamed as more complex, risk-weighted ratios can. Obviously, many smaller community banks already have capital ratios at or above this minimum level, and for most that don’t, it would be difficult to get there

The prize

What kinds of regulations could banks avoid if they met these qualifications? Hoenig offered his ideas that 1) they might be given longer periods between examinations by their regulators, such as every 18 months instead of every 12;  2) exempting a bank from having to complete some sections of the quarterly call report; 3) banks could avoid having to adhere to capital standards and calculations required under the rules of the Basel Committee on Banking Supervision, the international standard-setter.

“From our point of view, a bank that meets the 10 percent threshold of equity to assets and that doesn’t have trading or off-balance-sheet items, that’s a well-capitalized bank,” Mr. Hoenig said.

In addition, Hoenig suggested that qualifying banks could also escape having to conduct stress tests under the Dodd-Frank Act. “If you meet the 10 percent capital requirement and you’re traditional, we would do the stress test ourselves,” Mr. Hoenig said.

Banks meeting the criteria Hoenig propose would not be exempt from the Volcker Rule, which was intended to separate banks’ risk-taking trading desks from their federally insured units. That’s because these banks aren’t engaging in these kinds of practices. “The reality is that the vast majority of community banks have virtually no compliance burden associated with implementing the Volcker Rule,” Mr. Hoenig said.

Congressional support is required to make some of these changes. Politicians are well aware of the rules, since the clamor for regulatory relief from the large, politically connected financial institutions has been a constant ever since Dodd-Frank was enacted. After working to water down the rules as they were being written, today they are simply pushing for repeal.

How Hoenig’s proposal will be received remains to be seen, but the choices are quite clear as the regulatory community agrees with relief if they are permitted to differentiate between institutions that truly deserve a lighter burden and those that do not.

“For the vast majority of commercial banks that stick to traditional banking activities and conduct their activities in a safe and sound manner with sufficient capital reserves, the regulatory burden should be eased,” Mr. Hoenig said. “For the small handful of firms that have elected to expand their activities beyond commercial banking, supported with the subsidies that arise from the bank’s access to the safety net, the additional regulatory burden is theirs to bear.”

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

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Fed Beige Book–Banking Sector Continues to Improve

By Charles H. Green

The Federal Reserves’s  latest ‘Summary of Commentary on Current Economic Conditions,’–better known as the beige book–is out as of April 15, and provides some reassuring news overall about the banking sector. This book is a summary of comments received by all the Fed banks from business and other contacts outside the Federal Reserve System and and compiled by the Federal Reserve Bank of Cleveland. They remind you that it is not a commentary on the views of Federal Reserve officials.

The good news is that banking conditions remain positive across reporting Districts. On Federal Reserve System Beige Bookbalance, the overall demand for credit increased all districts in at least one lending sector. Credit demand was especially strong for commercial real estate in Dallas and Atlanta while stable in other districts.

Commercial and industrial (C&I) loans grew in seven districts, but was especially strong in Chicago, Cleveland, New York, and Philadelphia. Bankers in Atlanta reported that C&I lending to the energy industry slowed as a result of oil-price declines.

The banks in the San Francisco district reporting the build up of sizeable pending loan pipelines and have increased interest rates somewhat to cool that demand more in line with supply.

Consumer lending grew in three districts (Chicago, New York, and Atlanta) while soft in others (Cleveland and San Francisco). Auto lending remained strong in Chicago, Atlanta, and San Francisco, but a banker in Cleveland attributed weakening auto lending to very aggressive captive-finance operations.

Residential mortgage demand–particularly for refinancings–grew in Richmond, Chicago and Dallas and was steady in New York, but HELOC volumes fell in Philadelphia and Cleveland. Philadelphia and Kansas City district bankers expressed confidence in the quality of their loan portfolios, and New York and Cleveland bankers noted that delinquencies were down.

Bankers in the Richmond district reported that loosening of credit standards were a cause for concern that credit quality was declining as a result.

Read more at FederalReserve.gov.

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

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Growth in Nonbank Sector Needs Regulatory Response

by Ravinder Kapur

Speaking recently at a conference in Frankfurt Germany, the Federal Reserve’s Stanley Fischer said that regulators need to keep pace with the growth in the nonbank sector. While acknowledging that regulation is a cat and mouse game, he said that “since the global financial crisis, many reforms have been adopted for both banks and nonbank financial institutions. However, certain segments of the nonbank sector require further work.”

In 1980 the nonbank financial institutions accounted for 40% of the total credit market Stanley-Fischer-Federal-Reserveassets held by the domestic financial sector. By the late 1990s this figure had risen to approximately 66%. Since then, nonbanks have maintained their share at this level. Insurance companies, mutual funds and government-sponsored enterprises, primarily Fannie Mae and Freddie Mac form a large part of the nonbank credit market.

Fischer acknowledged three principal reforms that will impact the nonbank sector, including:

  1. The Financial Stability Oversight Council (FSOC), which was been created under the Dodd Frank Act. While the FSOC has been charged with the responsibility for identifying emerging risks and vulnerabilities to financial stability in the entire financial system, seven out of ten of its members are from supervisory or regulatory authorities relating to credit unions, broker-dealers, asset managers, and derivative market participants.
  1. The Securities and Exchange Commission (SEC) has adopted new rules for money market mutual funds. These are expected to reduce the likelihood of runs on prime money market funds.
  1. A rule finalized in October, 2014 requires the securitizers of some assets to retain at least 5 percent of the credit risk of the assets that collateralize the securities.

But Fischer pointed out that some segments of the nonbank sector are not covered and will require further reform from the regulatory community, including:

  1. Hedge funds and broker-dealers use secured short-term funds to finance assets that have long term maturities. This mismatch is not new and was always known as a risk that could result in their solvency. This risk became reality during the crisis when the Fed had to rescue money-market funds that funded short term liquidity of many leading banks.
  1. Mutual funds that track the return on illiquid assets like leveraged loans and credit default swaps offer daily liquidity to investors. This practice exposes them to liquidity risks.
  1. There is a dearth of data regarding hedge fund operations and the derivatives market that makes it difficult for supervisors and regulators to work effectively.

Nonbanks play a crucial role in the financial system, comprising two-thirds of the total credit market and responsible for significant economic benefits. However, they are also a risk to financial stability, as was clearly seen during the global financial crisis. The nonbank sector increases the complexity of the financial system by lengthening the intermediation chain, which has both banks and nonbanks in it. Further, many nonbanks are owned by bank holding companies.

The Federal Reserve has called upon regulators to respond to the challenge of these complexities.

Read more at FederalReserve.gov

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Myth of “Picking Winners & Losers:” Envy-Baiting Politics

By Charles H. Green

Editorial-Commercial lenders who use federal or state loan guarantee programs need to resist efforts by program opponents to miscast program effects and benefits.

Remember November 5, 2014? I do–it was a cool, peaceful autumn day in Atlanta, and delightfully quiet. The day after the midterm election was finally devoid of the mind-boggling attack of political television and radio advertising, screaming, screeching and threatening their way into your life at a seemingly unprecedented volume. The politicos seemed to give us a couple of months to recover, but January, 2015 was apparently the campaign reset date for 2016, a presidential election year.

And now the race is on to field a bevy of big-talking, ambitious and ambiguous politicians Twister Signwho are aiming for the big job. Invariably, the entire field will embrace “small business,” as a keystone of the American economy. And just as widely as that statement will be agreed with, a more careful dissection of their words will define the huge range of definition for what a “small business” is and how they would help.

Washington Post’s J.D. Harrision wrote about one of the early candidates, Rand Paul, offering him the premature title of “real champion of small business.” Tsk, tsk… it’s a little soon to be crowning anyone for anything, but everybody has their job to do. Based on the evidence laid out in Harision’s article, I personally think it would be worth allowing more time for other candidates to weigh in before anointing anyone.

What does this have to do with commercial lenders?

Harrison cited five points in Paul’s positions that he felt needed reflection by small business owners. You can read them all for yourself, but it’s basically a rehash of some well-known liturgy of the conservative right, with Paul’s more Libertarian slant. But one consistency repeated misdirection by the candidate:  “Government is inherently bad at picking winners and losers.”

Harrison cited a 2014 speech by Paul. “In the marketplace, most small businesses fail. If government is to send money to certain people to create businesses, they will more often than not pick the wrong people and no jobs will be created.”

And there you have what I see a decisive flaw in Paul’s and most of the Libertarian argument with the U.S. Small Business Administration, the Export-Import Bank and other federal and state government sponsored loan guarantees, research grants and even the Federal Reserve system: the government isn’t picking winners and losers.

Some misleading politicians, in this case Paul, practice what I call “envy-baiting” to attract others to their shortsighted efforts to reverse public policy that has proven itself time and time again. Good business policy pushed post-WWII America into a towering economy without a single, close competitor. If you are familiar with these credit enhancement programs, you will recognize Rand Paul’s sleight-of-hand: government doesn’t choose who gets a loan–the private lenders do.

If your bank uses credit insurance from the Ex-Im Bank, loan guarantees or subordinated credit with the SBA, or perhaps have an account at the Federal Reserve, imagine the risk–chaos–of losing these institutions. Upon the loss of credit insurance, provided by the borrower/lender paid fees, banks would back out of lending to tens of thousands of customers, from Mom & Pop businesses to financing exports of American-made products. Who wins? No one.

Successful public policy speaks for itself

Why? Because there are real risks in these sectors that wouldn’t be held by a privately-owned bank. Winners and losers? We all win in a healthy, vibrant economy that has effective tools to meet a range of capital financing needs, from high-flying industries that can tap into Wall Street for low priced financing, to a startup business supported by a federally-guaranteed loan.

Losers? Libertarians, like Paul, would have you believe that U.S taxpayers bear the direct cost of the loan losses of federally insured credit. That is a semantic lie that captivates their followers into believing that they are victims of impervious policy that takes from them and gives to someone else. The problem is that is a false premise.

Borrowers pay relatively high fees for loan guarantees and private lenders also contribute to the cost of credit insurance in addition to bearing direct credit loss exposure. Leading potential supporters, who largely have no familiarity with these programs or business in general, with the idea that they are being taken advantage of through the false “winners and losers” argument is disingenuous and dishonest.

Don’t misinterpret this article to be anti-Ron Paul or any other conservative or Libertarian candidate. But I do have a problem with his–and others like him–illogical dismissal of good public policy that works just fine. Several “think tanks,” such as the CATO Institute, American Enterprise Institute and Heritage Institute, unite to advocate against these programs, which represent a relatively small portion of the American economy, and an even smaller portion of the federal budget.

No one has bothered to explain their actual reasoning to me, so naturally I suspect their motive goes below the surface beneath what they really want. Since there are much larger targets that affect public spending more without the accompanying benefits to a majority of taxpayers, as they assert about small business financing, why not aim for bigger fish?

Why don’t they speak up and explain it to us without the fabricated politics of envy ever-present in their rantings?

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

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Prosper Marketplace Raises $165 Million & Future Prospects

By Ravinder Kapur

DealBook reported that Prosper Marketplace has raised $165 million in a new round of financing led by Credit Suisse NEXT Investors, which valued the online loan marketplace at $1.7 billion. This valuation is more than double what the company was appraised at this time in 2014. The investors included banks like JPMorgan Chase, SunTrust Banks, USAA and BBVA Ventures.

“They represent really strategic investors for us in the long term,” said Aaron Vermut, Prosper MarketplaceProsper’s chief executive. “In the past, our investor makeup was primarily venture capital and private equity, so branching out into strategic investors is new for us and very exciting.”

Credit Suisse is a strong believer Prosper’s business model and the future of marketplace lending. In fact, this belief in the company’s prospects led Credit Suisse to approach Prosper last year and offer to help find the investors for the next round of financing.

Last year Prosper Marketplace had revenues of $80 million on $1.6 billion in loan originations, a great improvement over 2013, when the company had revenues of $19 million on $360 million in loans. The phenomenal growth in the volume of business has attracted the attention of bankers like Credit Suisse and JPMorgan. Credit Suisse’s asset management arm, for example, allows some investors to buy parts of loans originated on Prosper’s market.

Prosper makes the sort of loans which were earlier made by traditional bankers. Under the current regulations, these loans (primarily to refinance credit card debt) are unprofitable for the big institutions. “We’ve changed the company so much, it’s unrecognizable,” said Mr. Vermut, who took over the company with a group of investors in 2013. “This is a real business.”

Earlier this year Prosper bought AmericanHealthCare Lending, which helps patients borrow money for elective medical procedures like cosmetic surgery. With the current infusion of money, Prosper Marketplace plans to grow its user base and increase its portfolio of loan services. Later this year it also plans to increase its brand awareness and improve its user experience.

For the current year the company expects a revenue of $180 million. In the first fiscal quarter the company has originated nearly $600 million of loans, up 300% from the same period last year. However, for the moment it will continue to grow its business rather than concentrate on turning a profit.

Prosper does not have any intention of going public in the near future, although it has completed a three-year audit by the accounting firm Deloitte.

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