Big banks see slow recovery for small business

May 27, 2011

Marc Bernstein’s response to reports of loan facilitators advising small business clients to avoid big banks: “It’s simply bad information.”

The head of Wells Fargo’s small business lending initiatives then pointed to the $3.7 billion the country’s fourth-largest bank (by total assets) lent to small firms over the first three months of the year – an increase of 27 percent over the first quarter of 2010.

“That’s not small change,” said Bernstein, who added Wells Fargo is the largest national lender of loans under $100,000 and was recently honored as the Small Business Administration’s (SBA) 2011 Large 7(a) Lender of the Year. “We are trying to do everything we can to get people who apply for a loan approved, but the fact of the matter is that there are a lot of small businesses that unfortunately have been hit very badly by the downturn and are struggling and it’s hard to see how they’re going to handle more debt.”

This appears to be the view of most big banks, who insist they are ready to lend, so long as the business owner can show they are capable of repaying the loan.

But what if your primary source of collateral – your house – has plummeted in value due to the housing slump that still has a grip on the country?

“We love collateral, but we are first and foremost cash-flow lenders,” said Bank of America small business executive Robb Hilson, adding a company’s current and future sales are a better indicator of its ability to handle more debt. “We could have bullet-proof collateral, but if the business owner has a hard time demonstrating that they can repay the loan vis-a-vis cash flow then we’re not as excited about doing it.”

Bank of America, the biggest U.S. bank, made more than $92 billion in loans to small and medium-sized business in 2010 and is the top lender of SBA 504 loans, which are used to purchase commercial real estate, upgrade existing facilities or buy new equipment.

“We think that’s a really good product, particularly for small business owners who have to refinance loans that are secured by real estate that has been hard hit from a value standpoint in the last few years,” said Hilson, adding the borrower only has to put up 10 percent of the payment, with the SBA guaranteeing 40 percent of the loan and the bank taking care of the rest.

Even with banks proclaiming they’re open for business, the willingness of small business owners to take on additional debt has fallen. Combine that with slow consumer spending and it’s not hard to see why small businesses are not hiring or expanding, said Bernstein.

“They’re as uncertain about the economy as all the rest of us,” he said, noting in some areas of the retail sector sales have dropped 30 percent from where they were in 2008 prior to the financial crisis. “If you were a small business would you consider this time to grow and expand?”

A recent Wells Fargo/Gallup quarterly survey revealed a decline in small business owner optimism since January, falling 12 points to sit at zero – an indicator that small business owners are generally neutral about their companies’ situation. A third of the 602 small business owners polled rated their current financial situation very or somewhat poor, up from 27 percent in the first quarter. And 22 percent expected their financial situation to be very or somewhat poor over the next year, an increase of 5 percent from January.

“People are a little bit cautious in this environment and understandably so,” Bernstein said, noting the situation had still improved from a year ago when small businesses charge-offs and bankruptcies were high. “Delinquencies are improving dramatically. That is the very sunny spot in this picture.”


In contrast to the Wells Fargo survey, Citibank is seeing the mood among small business owners improving with more of them thinking about hiring and spending on marketing, said Raj Seshadri, head of Citi’s small business operations.

The Citibank survey, released earlier this month, showed 68 percent of the 1,004 small business polled intended to increase marketing and 54 percent said they will offer new products and services. As far as growth over the next year, 19 percent said they plan to hire, up from 14 percent in January.

“So definitely a lot better than a year ago, but not to the point where they are jumping in with two feet as yet,” Seshadri said, adding the country’s second-largest bank saw small business loan demand nearly double in March from January levels. “What is clear is that there’s a turning point; there’s a change in trajectory starting at about second quarter of this year. We definitely see a bend in the curve.”

Bernstein is more tepid about a rebound, pointing out that while demand remains weak there are “some signs of firming.” He said the events of the last three years have taught small business owners about the dangers of over-leveraging.

“I just think people have a more sober perspective now having seen what can happen when you have a very deep recession.”


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Marc Bernstein’s comment below is simply untenable in light of what they did to kill small businesses in 2009:

“We are trying to do everything we can to get people who apply for a loan approved, but the fact of the matter is that there are a lot of small businesses that unfortunately have been hit very badly by the downturn and are struggling and it’s hard to see how they’re going to handle more debt.”

In 2009 Wells Fargo went through small business accounts with a machete and cut virtually all business lines of credits to zero, without so much as a notification letter. I was told by my Wells Fargo branch officer that they did not look at any individual accounts, credit history, etc. – just killed them all to make their own financials look better to the Feds.

Then insult to injury – AFTER these tens of thousands of business owners borrowed against their personal lines of credit, Wells Fargo jacked the interest rates on these lines to historic highs while they were enjoying a $25 billion bailout and historic low interest rates from their buddies at the Fed.

To say they are “doing everything they can to get people to apply for a loan” is nothing short of con man encouraging us to play three card monte. Or maybe it’s Lucy encouraging Charlie Brown to kick the football again.

Since the collapse of 2008 and the political hype to fix “too big to fail” Wells Fargo and the other 18 banks that were found to be too big to fail now have a larger share of the market than they did in 2008. What we learn from this is that big business, big banks and big government are all in each other’s pockets and the hyperbole that Marc Bernstein expresses in this article is just that.

$25 billion later Wells Fargo became got the gilded cage and all small business got from them was the bird. And I don’t mean the one with feathers.

Posted by ChuckBlakeman | Report as abusive

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Posted by Commercial Lending news May 28, 2011 | Business Relationship Manager | Report as abusive

It’s true that many banks are looking to make new loans to small and mid-size businesses.

Now is the right time to revitalize your relationship with your local banker. Conduct a performance review and a strategy discussion with your banker and put the bank in your corner.

Start the meeting with a review of clean, coherent financial statements that demonstrate you are on top of your business’s performance. Continue by sharing a reasonable budget and a 3-5 year forecast which clearly shows the capital needs and cash flow characteristics of the business.

Your typical CPA is not going to lead you through this process. Engage a part-time CFO and make your banking relationship an area of strength for your business. The ROI will be extraordinary.

Posted by ADI_Financial | Report as abusive

The gall of Mark Bernstein’s hyperbole. Mega banks lending to small business is dismal compared to their community banking counterparts.

According to MultiFunding research, in 2010, the top 25 banks controlled about 61 percent of all deposits, but made only 20.3 percent of all SBA 7(a) loans. Smaller banks held about 39 percent of all deposits but made 79.4 percent of all SBA 7(a) loans.

These banks are in your community as “deposit shops” to collect and send your money to Wall Street for god knows what. But it isn’t good for your community, that’s for sure. Move your money out of these banks. It’s just not good for the country.

Posted by joepadilla | Report as abusive