Posts filed under ‘Banks’

Is small business lending in NC doing better than the nation?

The Federal Deposit Insurance Corporation released data on bank statistics yesterday, showing a continuing trend of sluggish small business lending nationally. Inc.com reports that while commercial and industrial loans increased by 12 percent from 2011 to 2012, small business lending (here defined as loans under $1 million) only saw a meager 0.4 percent increase.

In North Carolina, the FDIC data show that small business lending has not kept pace with commercial and industrial lending overall; however, it has seen a much bigger increase than the national average.  Commercial and industrial loans issued by North Carolina banks increased 13 percent between 2011 and 2011, and loans under $1 million increased 5 percent. The data for very large banks (those with assets over $1 billion)  mirror this trend.

Despite the gap– small business lending is still lagging behind lending overall– this is significantly better than the national statistic. The question is, why? We continue to hear from our borrowers that accessing bank loans is still difficult, even for those who may have had bank loans in the recent past. More research would need to be done in order to figure out what is driving this data, however we have a couple of theories.

First, bank consolidation has meant that the operations of the large banks have become more concentrated. North Carolina has seen a significant number of bank mergers, and several of the major national banks are headquartered here. The FDIC only measures loans made to U.S. addresses– it does not distinguish whether or not the loans made by NC banks are to addresses within the state. It could be, therefore, that while banks are issued from bank locations in NC, the loans are actually to borrowers elsewhere.

Second, there is the question of who the banks are lending to. As we showed in our analysis of small business lending in NC, while large banks had a vast majority of lending resources, they were concentrating those resources on upper- and middle-income areas. We also had commented on a study by the National Bureau of Economic Research, which found that many more small businesses than originally though were accessing bank capital to finance their ventures. What the study also found, however, is that gender and race had an impact on a small business owner’s ability to secure outside capital.

As already mentioned, more research would be needed to answer these questions. If North Carolina is, in fact, doing better than the nation, it is important to ask why and find out who is benefiting. Digging deeper into the data may reveal that while small business lending is increasing, those who have historically faced barriers to accessing capital continue to do so.

 

 

 

February 27, 2013 at 11:59 am

Bank loans may be easier to get than we thought, but not for all businesses

SCORE’s Small Business Blog posts today about a study by the National Bureau of Economic Research that finds that start-up firms actually rely more heavily on bank loans and debt financing than most people think. Given recent trends in bank lending, many small businesses have faced increasing barriers to accessing capital from traditional lending sources, such as banks, leading many to rely on personal debt, raising funds from their family and friends, and credit cards to finance their ventures. However, this study,  based on the Kauffman Firm Survey which tracks 5,000 businesses over time, has found that these firms actually use more debt financing:

  • Debt was used five times more than equity
  • On average 25% of the startup’s capital structure was in the form of a bank debt
  • The average bank loan was approximately $48,000
  • Only 25% of entrepreneurs used personal credit cards for financing

SCORE’s blog post concludes that small businesses should not give up on the idea of getting a bank loan. The post points out that a bank loan “may not be for every entrepreneur,” which is actually a very important point to make. While it is encouraging to see data showing that capital may not be as restricted as we think it is, it’s still important to question who might be getting these loans, and who might still be left out.

The NBER study actually begins to answer this question by discussing the impact of gender and race on the use of outside capital:

  • The average female-owned business had 5% less outside debt than the same male-owned business
  • The ratio of outside debt to total capital was 13% lower for black-owned businesses than for comparable white-owned businesses.

Our own study of small business lending in North Carolina found that while the large banks hold a majority of lending resources, there are disparities in where those resources are deployed. Small business lending by the larger banks is more concentrated in upper- and middle-income areas, compared to lending by community development financial institutions (CDFIs), which is concentrated in low-income areas. Banks’ investment in upper-income census tracts is 250 times higher than it is in lower-income tracts.

In the end, a working flow of capital is necessary for businesses of all types and sizes to start up and continue to grow. Banks play a big role in providing capital, but they do not reach everyone. The NBER findings are encouraging, but there are still many who are not served by the  mainstream financial sector. Other factors, such as gender, race, and income also come into play and impact whether or not entrepreneurs can access affordable capital.

 

February 13, 2013 at 11:24 am 2 comments

More evidence that small businesses support accountability & transparency

Small Business Majority has a new poll out that provides even more evidence that small businesses support regulations on our financial sector, especially after the Great Recession. According to the poll, 80 percent of small business owners agree that Wall Street financial firms need tighter regulations and should be held accountable for their role in the financial crisis. The table below shows that two-thirds of small businesses believe that government oversight on Wall Street should increase or is sufficient the way it currently is.

The poll also found that a growing number of small business owners– six out of 10 in this survey– are using credit cards to finance their companies. This means that their personal and business credit are becoming more intertwined.  For whatever reason, they are not using traditional  loan products. From our own research we know that access to affordable capital is increasingly difficult for many entrepreneurs. This finding points to the persistent gap in financing available for small businesses.

As we’ve pointed out before, the issue of what small  businesses think or need is a highly politicized issue– and one that is claimed by advocates on both sides of the aisle. These findings fly in the face of another recent poll that we posted about, claiming that small businesses want less regulation and more federal spending cuts. Interestingly, this new poll shows that small businesses from  both political perspectives share this view. Seven out of 10 Republican small business owners believe that we need tighter rules and standards for the financial sector. A little more than half of the survey respondents identified as Republican, about one-quarter identified as Democrat, and the rest as independents. As John Arensmeyer, CEO of Small Business Majority, puts it, for small businesses  “this isn’t a party line issue for them. It’s a bottom-line issue, plan and simple, meaning it impacts their capacity to grow and hire.”

 

February 6, 2013 at 11:27 am 1 comment

Small business optimism up for 2013

Wells Fargo and Gallup have released their Small Business Index, which is a survey of small business owners on their current financial situation and their views on what the next 12 months have in store. The survey includes 601 small business owners, and was conducted during the first two weeks of this month.

The big takeaway from the survey is that small business owners are more optimistic about their prospects than last quarter. The index was up 20 points on overall optimism than in November 2012. This is due to business owners feeling positive about their performance in terms of revenues, capital spending, and jobs in the past year, and also feeling positive about their prospects for revenues, cash flow, jobs, and their overall financial situation in the year ahead. As Inc.com states, this is  “a dramatic turnaround from the end of last year, when the part of the index that measures business owners’ future expectations plunged to its lowest level since the start of the financial crisis.”

On the down side, it does not appear that hiring will increase significantly. Seventy-one percent reported that there will likely be no change in the number of jobs at their businesses, while the number of businesses that will add jobs did not increase from the last quarter. Even those who say they will hire are expecting to hire fewer jobs than they ideally would need. The primary reasons for this include that they don’t need any more workers, they are concerned about having enough consumer demand to support new jobs, the state of the economy, and potential costs of health care. Coincidentally, those businesses that are expecting to hire say they will do so because of increased demand.

These findings corroborate previous small  business surveys that we have reported on. Although there are a variety of issues that affect business owners, consumer demand and economic stability rank as the top factors. In order for these businesses to be successful, they need people to purchase the goods and services they offer. As the economy overall improves– and as individuals and families regain financial stability– the prospects for small businesses will also improve.

In related small business news, it appears that banks are also taking stock of their prospects when it comes to small business lending. Business News Daily reports that Bank of America, in response to its perception of small business lending as a growing opportunity  will be stepping up its efforts in this area, as it has recently hired more than 1,000 small business lending bankers. On the other hand, Bloomberg reports that Citigroup will be letting go of small business bankers, as a “realignment” within the company.

The economic recession and its ongoing impacts have changed the landscape for small businesses dramatically. From consumer demand to accessing capital, small businesses have faced a great deal of uncertainty in recent years. The various surveys of small businesses and the shifting roles of both big and small lenders all show that businesses and lenders alike are still trying to figure out and adjust to these changing conditions. But until the underlying challenges are addressed, the uncertainty will persist.  Many of the challenges faced by both businesses and lenders will be alleviated when economic recovery really reaches all communities– particularly those areas where small businesses are the main generators of economic activity.

January 25, 2013 at 1:43 pm

Small Business Lending Fund helps to increase capital to small businesses

The U.S. Department of Treasury published a report looking at the impact of the Small Business Lending Fund (SBLF), which was established as a part of the Small Business Jobs Act of 2010.  The SBLF is a $30 billion fund that provides capital to community banks (with assets less than $10 billion) to increase their small business lending.  The program has allowed the Department of Treasury to invest over $4 billion in 332 institutions.

The report shows that participants in the SBLF have in fact increased their small  business lending by $7.4 billion over a baseline of $36.5 billion. Three-quarters of the participants in the program have increased their small business lending by 10 percent or more. When compared to other similar institutions, SBLF banks have seen much greater increases in their outstanding loans– 32.3 percent increase, compared to 5.7 percent for banks within their peer groups, and 2.1 percent increase for banks that are in a broader comparison group.

The Charlotte Observer reports that North Carolina institutions saw an increase of $205.3 million in small business lending through funding provided by the SBLF. There are seven North Carolina banks that have participated in the SBLF program, some of which have seen significant increases in their lending to small businesses. Live Oak Bancshares out of Wilmington, which received $6.8 million from the SBLF, saw an increase in small business lending of almost 130 percent. Select Bancorp from Greenville, which received $7.7 million, saw an increase of about 60 percent.

This is all good news for small businesses and for community banks. The SBLF is not only expanding access to capital when the larger banks have receded from lending, it is also providing support for smaller, alternative lenders. In the landscape of small business lending, as the big banks continue to pull back and as the market continues to tighten, other community based lenders and banks will be stepping in to provide services and resources. Community banks, community development financial institutions (CDFIs), and credit unions will play a larger role in small  business lending. It is encouraging that federal programs such as the SBLF are having a positive impact.

 

January 22, 2013 at 11:22 am

New mortgage rules could help credit unions & small banks

Yesterday, we blogged about the new “ability-to-repay” mortgage lending rule announced by the Consumer Financial Protection Bureau. The rule sets forth stipulations to help ensure that borrowers can actually afford the loans that they qualify for. Again, it’s just common sense. But some in the banking industry warned that some of the stipulations, particularly those regarding “qualified mortgages” would tighten the credit market and make getting loans harder for certain borrowers like first-time buyers and  low-income people. But in fact, the new rule creates an exemption for small lenders, which may open up the market.

CFPB’s rules state that to be a certified qualified mortgage, borrowers must be evaluated on a range of criteria, including their income, credit history, debt, and others. The loan can’t have any of the more risky features like balloon payments or interest-only loans. In exchange, the lender would gain greater protection from consumer lawsuits. The biggest sticking point seems to be that the borrower must not have a debt-to-income ratio of more than 43 percent. This is a measure of how indebted borrowers are, comparing their income with the debt that they already have prior to taking on a mortgage. Banks say that this will significantly restrict the pool of eligible borrowers, and thus will tighten the credit market.

The catch is that there is an exemption for small banks and lenders with less than $2 billion in assets. If banks and credit unions that are below this threshold, and keep loans on their books rather than selling them, they could get the exemption to the stipulations laid out for qualified mortgages. Smaller lenders also have more flexibility with the types of loans that they can make.

What this means is that, while the larger banks may find that their pools of eligible borrowers shrinks, other lenders will be able to step in. This makes sense. For low-income and underserved borrowers, the type of hands-on financial counseling and training that credit unions and smaller banks and lenders provide is critical. Community banks, credit unions, community development financial institutions (CDFIs), and other lenders are better positioned to take on the risk associated with these borrowers, as they are designed to provide additional support to ensure borrowers’ long-term success. As discussed in a report we released last month, community lenders like CDFIs step in to fill gaps in lending and financial services, reaching individuals not served by the financial mainstream. With the new mortgage lending rules, these lenders will continue to do so.

So in the end it seems that the concerns expressed by some in the banking industry may be a bit over stated. The market will no doubt shift. The new rules create a new playing field that all providers will have to adjust to. But as some consumers find that they no longer can access credit at the major banks, other lenders will step in to create new pathways.

 

 

 

January 11, 2013 at 11:42 am 2 comments

CFPB announces new “ability-to-repay” mortgage lending rule

Today the Consumer Financial Protection Bureau (CFPB)announced a new “ability-to-repay” rule, which is aimed at making sure that lenders do not saddle borrowers with loans that they can’t afford.  In order to qualify for a loan, the borrower must have enough assets or income to pay it back, they must provide financial information that is verified by the lender, and the lenders have to assess the borrower’s ability to pay over the long term, including both the principal and the interest. CFPB also announced a few proposals: to exempt designated nonprofit lenders and homeownership stabilization programs, and to create a new category of “qualified mortgages” for small creditors like community banks and credit unions. Qualified mortgages are meant to reduce the amount of risk in mortgage lending by eliminating risky features, such as negative amortization and interest-only mortgages, and offer borrowers more protection. In exchange, lenders that make certified qualified mortgages will be protected from consumer lawsuits.

The ability-to-repay rule seems like common sense, but the fact that it has to be spelled out points to just how far banks and lenders had gone in making loans to people who could not afford them. Lending standards had become so lax that people were qualifying for loans without even providing validation of their income, credit history, or even showing an understanding of the terms that they were agreeing to. Previous rules issued by the CFPB, which will be finalized this month, were meant to increase transparency with mortgage lenders and provide consumers with timely and accurate information. Borrowers need to be provided with the information they need to make sound decisions. This new rule, which will take effect in January 2014, will take it a step further. Now lenders and borrowers will have to provide some assurance that they will, in fact, be able to pay the loan. Here’s how the Chicago Tribune sums it up:

For all types of mortgages, to help determine a borrower’s ability to repay, lenders must look at eight factors. They include current income and assets, employment status, credit history, the mortgage’s monthly payment, other loan payments associated with the property, monthly payments for such things as property taxes, other debt obligations and a borrower’s monthly debt-to-income ratio.

Some banks have expressed concerns, particularly around the criteria for qualified mortgages. According to the rule, borrowers’ debt-to-income ratio is capped at 43 percent. The American Bankers Association says that this may be too low and might unnecessarily tighten access to credit. Banks will be encouraged to follow the qualified mortgage lending criteria due to the protections it offers, but the result, they claim, may be fewer borrower who can qualify for loans– in particular, low-income or first-time homebuyers.

Though the new rule may contain some tighter standards, the mortgage lending industry had run so amok that it is not surprising that the process of reigning it in is causing some consternation. Whether the debt-to-income ratio will have a significant impact is yet to be seen, and the industry has a year to adjust to the new regulations. The rest of the rule, however, is simply common sense. Banks and lenders should not be making loans to people who can’t afford them. For those who are excluded under the new rules, such as low-income families seeking to build up their assets, perhaps adjusting the rules and providing hands-on financial counseling to ensure their financial success can help balance out the equation.

 

January 10, 2013 at 12:20 pm 1 comment

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