Commercial Finance and TARP Money Small Business Loans Considered

There has been a lot of talk in the financial news about the challenges of getting money into the small business community so those companies can expand, hire more workers, and provide the economic engine to sustain our economic recovery. The Obama Administration has a plan, but like any plan to revive an economy, it requires all the players to be on board. If they are, then this infusion of small business financing money couldn’t come soon enough.

There was an interesting article recently in the Wall Street Journal, sub-section CFO Journal on June 23, 2011 titled “Banks Wary of TARP Approach to Small Business Lending,” by Emily Chasen (Senior Editor). The article stated:

“The Obama administration’s efforts to spur small-business lending through a spin-off of the Troubled Asset Relief Program (TARP) – hasn’t exactly received thunderous support from community banks, who may be too worried about government intervention if they accept funds, and the creditworthiness of prospective borrowers, to make a dent in the frozen small business lending market.”

Okay so perhaps you watched the TV Movie “Too Big to Fail” about the TARP Program and the financial crisis, fall of Lehman Brothers, and global economic crash. There was a decent write up on that TV Movie in the New York Times recently titled “The Financial Crisis Comes to TV” by Michael J. De La Merced published on May 23, 2011. In that movie we watched the fiasco, and the laws of unintended consequences during times of crisis management.

Now, another TARP Program comes to town, one which will lend money to small self-run businesses. Unfortunately, demand for little business loans is weak. Some say this is due to the uncertainty of future government regulations and the future economy and no little business owners wish to take the risks. Others say the small business community already knows the risks and the new regulations and therefore are not interested in borrowing more money, or taking on new debt.

This also means that small businesses will not be hiring more employees to help us with our unemployment situation here in the United States. And that of course doesn’t bode well for the reelection of President Obama, or boost confidence in the business sector of the strength of the economy. Yes, it is quite important to have more funds available in the banks for small companies, but they are not willing to borrow money, even at the current low interest rates, and if it really isn’t worth the risk for the bank’s at those low interest rates then the program is likely to fail and not satisfy its objectives.

Our small business community is too important, and each and every one of those businesses is too small to fail, well most of them. And if they do fail, they should fail on their own accord, not at the hand of poor government policies or over regulation. The good thing in all of this is if you are a small self-run business, or a startup entrepreneur looking for funds, you might find them available, and you just might convince a bank to give you a decent loan for your future projects. Indeed I hope you will please consider all this.

Funding For Small Businesses Via Angel Investors

Outside of receiving a loan from the Small Business Administration, the most common way to have your business financed is through the use of an angel investor. In many instances, entrepreneurs turn to these private financing sources because they are able to provide flexible financing terms with the intention of being able to cash out their investment at a much later date. Unlike SBA loans, an angel investor is primarily seeking to profit from the capital appreciation that is associated with your business. As such, if you do not qualify for small business financing through a normalized method of lending then it is may be in your best interest to work with a private funding source to assist you in obtaining the capital that you need in order to start or expand your business activities. 

Throughout our series of discussions, we have primarily focused on the benefits of working with an angel investor instead of a small business investor. Of course, in addition to the capital that they provide, a small business investor or angel investor is able to provide you with a substantial amount of guidance and information as it relates to the ongoing operations of your business. The Small Business Administration is generally able to provide you with a similar amount of information, but an angel investor that has a stake in your company is almost more than willing to provide you with a substantial amount of direct guidance as it pertains to bringing your business to profitability or generating a positive cash flow. We are going to continue to discuss the merits of receiving funding for small businesses via angel investors through many of our future articles.

Of course, the primary drawback to working with an angel investor is that they are going to want to have a significant amount of say as it relates to their investment. This is primarily due to the fact that your private investor is going to become a major owner in your business. Additionally, the investment contract that you sign with a private investor is going to dictate the level of day to day control that a potential third party funding source has in your business. As we have discussed before, when you sell a significant portion of your business to a third party investor you can expect that they are going to want to sit on your board of directors while also being able to have selective control functions as it pertains to how the business is run on a day to day basis.

As always, you are going to want to make sure that obtaining small business funding via the use of an angel investor is in your company’s best interest. One of the most important things to consider is not only the cost of capital as it relates to an equity sale of your business, but also how much control you will have to give up when working with a third party funding source.

Small Business Finance – Banks Cite Risks For Lack of Small Business Funding

Federal Reserve chair Ben Bernanke is upset over sweeping inconsistency in small business loan approvals in the United States. Bernanke says that banks throughout the nation are denying loan requests from credible small businesses. He urged banks to stop being passive, and start being more active, by lending more to small businesses, adding that they are “crucial to America’s recovery.”

However, bankers feel disillusioned over Bernanke’s sentiments.

They earn money on each loan that they issue. There is a profit-driven motivation for banks to lend. It would seem to be illogical for a bank not to issue a loan, to a credible small business. Most bankers feel that there are fewer businesses to lend to, but are eager to start lending to creditworthy candidates.

Banks versus Washington, and the risks of lending.

The problem remains the same, there is a gap between what the government wants versus the banks. Therefore, the urging by Bernanke seems to be valid from the standpoint of trying to ignite a spark of motivation in the system. Banks remain apprehensive to initiate a loan, without the backing of solid credit history.

Banks are dealing with their own problems, including the latest credit crunch, and shrinking consumer spending. Small businesses have seen their property values dwindle, and funding being limited.

Therefore, risk is hard to accept when it comes to lending.

In states where there are large deficits, risk becomes more of a problem. Small businesses who have felt the added pressure of the decline of a state’s economy may have bad debt, foreclosures, and may face a worsening attitude about lending overall.

The environment for bank lending at this moment is volatile at best.

With businesses seeking to reduce their debt, consumers earning far less money, and markets continuing to level-out, it is uncertain when confidence will be seen in the power of lending. As this happens, consumer prices are being lowered to reflect the economical shift; thereby accentuating big business who can afford the cuts, and the minimizing of smaller businesses and niche markets who cannot.

Legislation is also a key concern of many lending agencies and small businesses. Health care reform has businesses up-in-arms about what to do, and how they will be classified with the reform. They are unsure what the tax burden may be, and are worried that they will incur a tax burden too heavy to bear.

Overall, confidence is what will spur the change in both areas.

Washington is trying to motivate the lending world, with legislation such as H.R. 5297, TARP and the codenamed “TARP Jr.” all of which aim to help with small business lending. Most banks argue that the problem is creditworthiness. Lenders are reticent about any legislation such as TARP, but it must be stated that it never requires lending agencies to do actual lending, it only adds the incentive to do so. Therefore, there is not much of a reason for banks to argue against legislation such as TARP or small business lending programs.

Ultimately, banks hold the power and are hesitant to give out loans to businesses they see as risks. However, there is always risk associated with lending; it is up to the lending agency to determine how much risk to bear, and at this time, they want to keep the tide in their favor.

Some people agree that not all the blame can be put on the banks.

It is easy for the media to vilify banking, and “big corporate” entities. However, every loan a bank makes is also scrutinized by Federal regulators. If a bank makes a loan that is not profitable, they must set aside cash to offset the potential loss. Therefore, why would a bank want to make a loan that is too risky? Some people also argue that regulations should be decreased to allow banks to make riskier loans, but this line of thinking seems flawed at best. The housing collapse was a direct result of mortgage lenders who took advantage of a lack of specific regulation regarding risk assessment, thereby making profit on loans that they knew could not be afforded over the long-term. It is obvious the blame is both on greedy lenders and naive borrowers, in that situation.

Some argue that it is Obama’s fault.

Others blindly put the fault on the Obama administration citing that debt spending will doom the economy. And that the federal government has somehow incited uncertainty in the market. However, the facts are easier to discern. During the Bush presidency, national debt almost doubled. It has almost doubled again since then. And since 2007, the national debt has increased at a rate of 4.14 billion per day. It also must be noted that first-term presidency’s experience the debt of the previous 4, or 8 years of legislation that they did not oversee. Small business owners feel that the government just adds to the red tape associated with operations. Most feel that they are already burdened with too much debt. They are less inclined to hire more workers due to the shrinking of capital, and the uncertainty of confidence in Washington.

Others believe the banks are at fault.

Many argue that the reason there are so many unworthy candidates for loans is because of a banks power to freeze credit, or tighten lending practices. Consumer confidence is also related to credit. If there is a freeze in credit, potentially as it is now, then confidence in the financial industry will fall. Other logic dictates that lending is about risk-management, if banks, who can acquire reserves at no, or very low costs, refuse to lend, then ultimately that is their choice. If there were virtually no risk with lending, the economy would be remarkable, and there would essentially be no, or very little risk taking with business loans. Therefore, the argument of citing risk as a problem does not seem to reflect the real sentiment of the banks; many feel that they just do not want to lend in the current economic condition.