Browse by Tags

Even in good times, small businesses have access to fewer credit sources than medium-sized or large businesses. As a result, they are looking for loans in same markets as general consumers. Recently, that has meant small businesses see their credit opportunities tied to their real estate holdings. So when we see a housing crisis of the sort we've been trying to get through, the credit flow is interrupted. James Wilcox --professor of economics and finance at the Haas School of Business , and a visiting scholar at the Federal Reserve Bank of San Francisco --argues that policy makers need to recognize the "particular vulnerabilities of small business to financial crises" in order to better manage credit opportunities to a vital segment of the US economy. In a recent Economic Letter , Wilcox shares this graph: And he writes: Since the onset of the crisis, the credit environment for smaller nonfinancial firms has been much different than for larger nonfinancial firms, due partly to the decline in the values of commercial real estate and the meager rebound in CMBS securitization. Figure 2 shows recent issuance of corporate bonds, CMBS, and non-real-estate ABS. New issues of corporate bonds, an important credit source for large businesses, dropped sharply in 2007 and 2008 before recovering somewhat. While corporate bond issuance has yet to consistently surpass its 2006–07 peak, its average during 2010–11 was higher than it was before the pre-crisis credit boom. The figure also shows that ABS issuance collapsed during the crisis. Issuance rebounded after 2008 to about half its 2007 level. The ABS 2009 recovery was probably due in part to the Fed’s Term Asset-Backed Securities Loan Facility program, which provided loans to ABS investors. The recovery may also have reflected the fact that these securities were backed by assets other than real estate, such as vehicles. Figure 2 also shows that, during the crisis, CMBS issuance—the chief avenue through which small businesses connected to the broader credit markets—halted almost completely and has remained virtually nonexistent since. Declines in residential and commercial real estate prices and uncertainty about future prices may continue to reduce investor willingness to fund loans collateralized by real estate. Thus, small businesses may find that their real estate collateral won’t support the volumes of credit they used to, at least in the immediate future. Read the full article here .

In case there was any doubt small businesses have suffered from a lack of access to credit during the recession, CNN Money 's Catherine Clifford shares some data from the Small Business Administration. The total value of outstanding loans to small businesses plunged by $43 billion, or 6.2%, between June 2009 and June 2010, according to a report released this week by the Small Business Administration. That's a drop of $59 billion, or 8.3%, from June 2008. Measuring lending to small businesses is like trying to nail Jell-O to a wall, because every institution and government agency has its own definition of what constitutes a small business. For this week's study, the SBA drew on data reported to the Federal Deposit Insurance Corp., which tracks lending by the banks it regulates. Both the SBA and FDIC assume that all commercial loans of $1 million or less went to a small business. Read the full article here .

In the two years of the recession, and especially since September of 2008, the key struggle for many small business owners was access to credit. But that may be slowly changing. CNNMoney is reporting that the Small Business Administration's key lending program saw a significant rise at the end of the year. The SBA processed 12,393 loans through the program in the last quarter of 2009. That represented a 38% increase over the previous year. Still, loan activity falls well short of pre-recession levels. From Catherine Clifford of CNNMoney: The SBA credits the improvement to a slew of stimulus measures. "The big takeaway that we have when we look at this is that we were successful in turning around the SBA lending," SBA spokesman Jonathan Swain said. Still, lending remains far behind pre-recession benchmarks. Two years ago, in the last calendar quarter of 2007, the SBA backed more than 20,000 small business loans. "While there are some indicators that the economy is moving in the right direction, no one would say we are out of the woods yet," Swain said. A lagged recovery: SBA loans represent a tiny portion of the overall small business lending landscape, but they're an important barometer of banks' willingness to extend credit to startups and growing companies. The SBA program guarantees a portion of the money banks lend to qualifying businesses. If the borrower defaults, the government pays the bank back. Credit conditions for large businesses have largely returned to normal after the dire credit crunch that followed Lehman Brothers' collapse in late 2008. But small businesses have not enjoyed the same recovery. Sales are down at most companies, and the value of assets typically used as collateral -- like real estate and goods in inventory -- has fallen. That leaves many banks reluctant to lend to borrowers they view as risky bets. Read Small business lending begins to rebound here .

In the November Harvard Business Review , Robert Pozen --former adviser to President George W. Bush and Massachusetts Governor Mitt Romney, and current chair of MFS Investment Management--weighs in on the debate over whether accounting rules bear some blame for the financial crisis. And he says that both sides in the argument over whether "fair value accounting" exacerbated the credit crunch a year ago may be wrong: We do not want banks to become insolvent because of short-term declines in the prices of mortgage-related securities. Nor do we want to hide bank losses from investors and delay the cleanup of toxic assets—as happened in Japan in the decade after 1990. To meet the legitimate needs of both bankers and investors, regulatory officials should adopt new multidimensional approaches to financial reporting. Before we can begin to implement sensible reforms, though, we must first clear up some misperceptions about accounting methods. Critics have often lambasted the requirement to write down impaired assets to their fair value, but in reality impairment is a more important concept for historical cost accounting than for fair value accounting. Many journalists have incorrectly assumed that most assets of banks are reported at fair market value, rather than at historical cost. Similarly, many politicians have assumed that most illiquid assets must be valued at market prices, despite several FASB rulings to the contrary. You can read his article here (subscription only). You can also watch Pozen discuss the issue, along with a brief introduction to some of the ideas he puts forward in a new book, Too Big To Save , in this video from Harvard Publishing:

The Federal Open Market Committee (FOMC) is set to meet Tuesday and Wednesday of this week. Tim Duy points out that Ben Bernanke and friends will be meeting with a far more positive "economic backdrop" than they have had for a long time. But for all the relatively good economic news there is, uncertainty remains. Duy believes that the FOMC should continue to anticipate slow recovery, and he points to limited consumer credit as a primary reason: Given the steady anecdotal buzz surrounding the deterioration of the commercial real estate market, it is difficult to expect a rapid reversal of these trends. In short, if you think credit markets are still under stress, as the Fed certainly does, and are worried about the availability of credit to support future spending, also among Fed concerns, then shifting rhetorically to signal a tighter policy stance irrational. Moreover, it would seem inconsistent with plans to continue expanding the balance sheet via purchases of mortgage backed securities and TALF assets. So, it seems Duy is telling us not to expect a drastic change in Fed policy until we see a major shift in consumer credit and unemployment. Read Even With Growth, A Long, Hard Road here .

Karen Mills was confirmed as head of the Small Business Administration in April, and then in May launched another effort to help small business owners with one of their biggest challenges: getting loans. Mills announced the new America's Recovery Capital loans in her National Small Business Week address : These short-term loans of up to $35,000 can be used to cover payments on non-SBA debt. They have no SBA fees or interest costs for the borrower and are 100 percent guaranteed by the SBA. The loan is for six months, followed by 12 months of no repayment and then 5 years to pay it back. ARC loans are for viable businesses, meaning that the business must have an established history of good performance – but they are in a situation where they just need a little extra help to bridge the “troubled waters.” The SBA is scheduled to accept loan packages from lenders under this program June 15. Mills says the larger efforts by the Obama Administration have begun to unfreeze credit. But she told CNBC 's Your Business that they need to keep working on re-starting the secondary market for loans, and to make the SBA loan process more accessible and less bureacratic for business owners: Visit msnbc.com for Breaking News , World News , and News about the Economy

The Federal Reserve tried to jump start nonbank consumer lending through Term Asset-Backed Securities Loan Facility ( TALF ) . TALF is aimed at hedge funds and investment firms--or "shadow banks." In this Whiteboard segment, Marketplace's Paddy Hirsch explains the importance of the shadow banking system in the US economy: Shadow banking from Marketplace on Vimeo .

Tim Figgins decided to become a small business owner last year. He had been a business consultant, but chose to buy a boat shop in Newark, Ohio when he learned the owners were looking to retire. In order to get started, he needed a to find a bank willing to lend startup money. And as we know, the last 12 months have been a very tough climate for small businesses looking for loans. But, according to CNNMoney.com Small Business , Figgins was able to work with a bank that has a lot of experience giving out Small Business Administration backed loans, Huntington National Bank in Columbus, OH: While most SBA lenders have sharply cut their loan volume, Huntington has ramped up. One major factor is that the bank keeps the loans it originates, rather than reselling them in bundles to investors. That secondary market underpins as much as half of all SBA-backed lending; when the bottom fell out of it in September, many banks unable to resell their loans then lacked the liquidity to make new loans. Huntington steered clear of that trap. But the bank's officers also emphasize that their success comes from perfecting the SBA procedures. "If you don't do the loans frequently, it can be challenging," says Jeff Rosen, Huntington's business banking director. "We have a process that is easy to meet the demand, because our specialists focus on SBA lending only." CNNMoney profiles Figgins and five other small business owners who were able to get financial backing for their startups. Read about them here .