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Making Borrowers Healthier, As Well As Banks

Posted by: John Tozzi on December 11, 2009

One reason the credit crisis persists for small businesses is that even as banks have tightened their lending standards, fewer small businesses are considered creditworthy. Many have seen sales drop, cash-flow slow down, and the value of their assets plummet. So even though banks may be healthy enough to lend, businesses aren’t necessarily healthy enough to borrow.

In this week’s magazine I wrote about a new program to address that problem for small manufacturers in Michigan. The program makes borrowers more creditworthy by putting up additional collateral in the form of cash deposited into the lending institution. That makes up for the often steep declines that manufacturers have suffered in the value of the assets they have as collateral, including real estate, machinery, receivables, and inventory. None of this is worth what it was two years ago, especially in Michigan. From the piece:

A company that had collateral valued at $6 million three years ago could now see those same assets appraised for $2 million, says Ed Mounce, commercial services manager at OMNI Community Credit Union in Battle Creek, Mich., because of the glut of real estate and equipment.

To buy the robots, steel, and presses it needs to diversify, Wolverine [Metal Stamping] had lined up a $2.5 million loan from GE Capital (GE) as of September 2008. While a spokesperson says GE doesn’t comment on individual credit decisions, Wolverine’s chief financial officer, Bruce Weber, says GE backed out the day after Lehman Brothers collapsed. For over a year, he says, “we’ve been trying to get the exact same financing done”—but during that time Wolverine’s machinery had depreciated by 20%. Meanwhile, the company booked $10 million in new business with such appliance makers as Whirlpool (WHR).

The collateral problem is compounded for businesses that had credit lines cut or reduced in the crisis more than a year ago and have been spending their cash since. For all the talk from Washington about boosting small business lending, no policy response has actually addressed the problem that small businesses—often through no fault of their own—are bigger credit risks than they were a year or two ago. (Expanded SBA loan guarantees help, but they’re really backstops — banks don’t want to lend on the expectation that they’ll have to collect a guarantee.)

You can read more about the program in Congressional testimony from Ned Staebler, who coordinates the program for the Michigan Economic Development Corp. It may not be a cure all, but it’s a new approach to a problem that more than a year after the crisis began policy makers still have not adequately addressed.

Reader Comments

Carol Cross

December 12, 2009 1:42 PM

Finally! John Tozzi applies a little common sense to this situation.

Even with 90% and maybe 95%? guarantees by the SBA, the banks, who have been burned by taking collateral against home equity for business investments, will not be in a hurry to loan to "unsustainable" small businesses based on collateral (assets) that can continue to lose value in the current crisis.

The Commercial Real Estate Market and Retail Small Businesses appear to be in trouble and this scenario has not played out.

And, the "guarantees" in the secondary markets may not be as valuable as before to the banks as products because so many investors have been burned in their investments in "receivables" and the market for these kind of securities is not what it was a few years ago.

Again, the "big franchisors" (big business) appear to be the only parties who will gain from the TARP funds and the bailout of small businesses. The taxpayers ate the 2.5 bil loaned? to CIT and I bet most of that benefitted "big franchising."

Why won't anyone take a look at "big franchising" and how "churning" and "encroachment" is subsidized by government?

Why won't the policy makers come to terms with the "failure rate" of all small businesses?

It appears that the banks are doing just that and protecting themselves and their stock holders.

W3 Business Advisors

December 15, 2009 5:00 PM

Being a bank is about taking calculated risks. There are a great deal of small businesses that would be perfectly fine if just given a little more credit so that they could grow their business. I think lenders really need to take a step back and realize that all the large franchises where once small too.

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What's it like to run your own company today? Entrepreneurs face multiple hurdles new and old, from raising capital and managing employees to keeping up with technology and competing in a global marketplace. In this blog, the Small Business channel's John Tozzi and Nick Leiber discuss the news, trends, and ideas that matter to small business owners. Follow them on Twitter @newentrepreneur.

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