Searching for Capital

A broker assesses the small-business lending market.

Last week, I wrote a post about a joint announcement from the Small Business Administration and 13 of the largest banks in the country that they had increased their small-business lending by more than $11 billion over the past year. As I noted, this number stands in stark contrast to the number these banks self-report to the Federal Deposit Insurance Corporation, which shows that their lending has fallen by more than $2 billion.

Getting capital into the hands of small-business owners and entrepreneurs at affordable prices is a critical issue for our economic recovery. And that’s why it is important, when the largest banks in our country and the S.B.A. administrator make an announcement, that we understand what it means. I am happy to report that the Financial Services Roundtable, an organization that represents those 13 big banks, provided a statement in response to my post. We’ve decided to share the full statement, because we feel it provides some important clarification (while also raising some additional questions). Here it is, followed by a few of my thoughts:

After reading Ami Kassar’s Tuesday column (“The Big Banks Say They Are Meeting Their Lending Commitment”), we want to make sure you have information on F.D.I.C. call report data, what it shows and how it differs from the lending commitment reported by Karen Mills, U.S. S.B.A. Administrator, so this data is reported accurately.

In the conclusion of his article, Mr. Kassar wrote: “According to Ms. Mills, the banks are up by $11 billion; according to the F.D.I.C. call reports, the banks have fallen behind by more than $2 billion. We are still hoping the banks will explain what exactly they have committed to do.”

There is a straight-forward explanation behind the seeming contradiction Mr. Kassar cites. The lending commitment measures the increase in credit the 13 participating banks have made available. So, for example, if a bank provides a small business with a line of credit totaling $50,000, that bank is making $50,000 of credit available to the customer. If in the following year, the bank raises the customer’s line of credit to $75,000, that would be an increase of $25,000 which would be reported as part of measuring success against the lending commitment referred to by Ms. Mills.

The F.D.I.C. call report numbers measure the amount of credit small-business owners are actually using. If the customer in the example above has an outstanding balance of $20,000 against their $50,000 line of credit, the F.D.I.C. calculation would reflect only $20,000. If that same customer decides in the second year to pay their balance down to $15,000, this would result in a $5,000 decrease in the F.D.I.C. reported borrowing – even though the amount of credit made available to that customer by the bank has increased $25,000. Paying down the balance is the customer’s decision.

The banks participating in the lending commitment are working to make more credit available to small businesses and have made great progress in increasing new lending, as Ms. Mills reports. How much actual borrowing businesses do against their available credit is a decision made by business owners based on a number of factors, including how confident they are about the economic environment and the prospects of their business.

Just as consumers recently have been paying down their credit card balances, F.D.I.C. data shows us that small businesses are paying down their bank debt too (and not just cards and lines of credit). This is not something banks control nor should they try to influence what small-business owners do with their credit. It would be like saying to a consumer: we’ve increased your credit card limit so you need to increase your outstanding balance owed. Banks only determine the amount of credit they make available to small businesses, which has been increasing as reported in the lending commitment numbers. It’s business owners who decide how much they actually borrow at any given time.

The F.D.I.C. call report data gives us some insight into the use of credit by small businesses. Yet it does not show new lending commitments and should be not be used as a measure of a bank’s new lending to small businesses.

The Financial Services Roundtable is correct in that the F.D.I.C. numbers reflect actual monies borrowed by small businesses. These numbers tell the precise amount of loans to small businesses with a balance of $1 million or less.

Judging by the banks’ statement, I believe it remains very difficult to determine whether these banks have really done anything to make credit more available to the small businesses that need it. First of all, the banks’ numbers still include loans to companies with revenue of as much as $20 million. With a few strokes on an excel spreadsheet, they could tell us the corresponding numbers for companies with revenue of $1 million or less.

Second, this statement confirms that the loan dollars noted in their commitment include credit card debt. That means a significant portion of the $11 billion they are bragging about comes from the millions of small businesses who use credit cards for convenience or to earn cash-back and frequent flier points — not as capital to build their businesses. The statement also makes clear that when it comes to lines of credit, small businesses have only borrowed a fraction of the money that the banks are taking credit for lending.

Given these issues, as I have previously discussed, I still believe that the F.D.I.C. call numbers are a better barometer of small-business lending. The Obama administration has talked a lot about transparency. Wouldn’t it be appropriate for the S.B.A. administrator to demand clarity from the banks and share it with the small-business community? As a starting point, they could at least pull the credit card loans out of their numbers.

Ami Kassar founded MultiFunding, which is based near Philadelphia and helps small businesses find the right sources of financing for their companies.

Article source: http://boss.blogs.nytimes.com/2012/10/01/the-biggest-banks-tell-us-a-little-more-about-their-small-business-lending/?partner=rss&emc=rss