Big banks see slow recovery for small business
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.”