Solving the Small Business Credit Mess

The U.S. federal government said the Great Recession was over in June 2009. Unfortunately, it’s at least year three and counting of a very difficult economic climate for many people . It’s not just the protesters at Occupy Wall Street or in your local community; it’s every darn small business owner. Why are they so mad?

For small business owners, large commercial banks got them into this mess and now they are preventing them from getting out. Bankers have become as respectable as used car salesmen. Large commercial banks that practiced unprofitable lending policies that were deemed “too big to fail” where bailed out by the federal government through the “Troubled Assets Relief Program.” While most of TARP’s $245 billion that it invested in banks has been repaid, the banks aren’t doing much with the profit. Absolutely, positively nothing.

Robert Eyler, professor of economics at Sonoma State University in Rohnert Park, Calif., provides a shocking insight into the current state of banking. Before the 2008 recession, he states that banks had about $2 billion in assets that they had not lent out. Today, they have $1.5 trillion on hand!

“We Are Lending!” is a popular sign in front of many banks these days. It invites the small business owners to apply for a loan even though their chances of getting one is very low. What is worse, banks tease small businesses by advertising low interest rates on loans. When I inquired at my local bank about who can qualify, the reply was, “Not many!” I now need to explain to my teenage sons that banks used to lend money, not just charge fees to keep your cash or give out coffee, cookies and trinkets on Saturdays. (When my son asked me why there was a guard at the bank, I told him that it was to make sure no one asked for a loan.)

Paradoxically, now entrepreneurs need to prove they don’t need a loan in order to get that loan. This is reminiscent of a joke that says banks will give you an umbrella when it’s not raining, but take it away when it starts to storm. Without credit, it becomes very difficult for most small business owners to expand their companies, and that is exactly what the economy needs. Large commercial banks should be ashamed of how little of their available funds has been lent out since 2009.

At the same time that banks are stockpiling cash, their fees are increasing on almost everything. Public opinion recently thwarted Bank of America from charging fees for using its debit card. However, the average bank has 49 different fees, ranging from $1.50 to $175. Among them are fees for:

• Overdraft protection • Using an ATM machine • Receiving or sending a wire transfer • Making copies of statements or checks • Replacing a debit card • Not having enough transactions monthly • Not depositing money in a given month • Closing the account too quickly • Making online transfers to other banks

This has prompted a response by small business owners to move their accounts to community banks and credit unions. In fact, November 5, 2011, was proclaimed National Bank Transfer Day, which encouraged 40,000 people to move $80 million to less-costly credit unions. In fact, the Credit Union National Association reported that from September 29 to November 5 650,000 people joined credit unions, more than in all of 2010. Not surprisingly, in the retail banking sector, more customers are choosing Wal-Mart’s financial services over those of banks.

The blame is not all on the bank executives. In an overzealous effort by the federal government to ensure that another politically-charged banking failure does not happen, the FDIC imposed very strict lending rules. It makes it much more difficult for the banks to lend money, even as political leaders publicly push those same banks to do more with the SBA. New laws require the FDIC to establish minimum leverage capital requirements and minimum risk-based capital requirements for all banks.

Banks also make payments to the FDIC’s Deposit Insurance Fund based on total domestic assets minus the tangible equity of the bank. The FDIC determines new ratios of insurance premiums to assets, where banks with higher safety ratings get lower ratios. In other words, if you lend less, you pay less. In fact, the largest banks with $50 billion in assets are also now required to show the FDIC how they would break up and sell off their assets if they were in danger of failing.

Small business owners can no longer wait for the pendulum to swing back to the lending side of the ledger. The FDIC must take action to allow and instruct banks to make loans for small business. They should establish a fund for small business from the $20 billion profit that the federal government made from TARP. This “Small Business Relief Fund” would more than double the loans that are currently available through the SBA.

If small business is indeed the key to a broad economic recovery, the FDIC, the SBA and the federal government need to pay more than lip service to it. Stable and rich banks are still a failure to the economy and to every small business owner who participates in it.

What do you think the solution is to the small business credit mess? What path should be taken?

Protest Photo via Shutterstock

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