Searching for Capital
A broker assesses the small-business lending market.
Last September in Cleveland, 13 of the nation’s largest banks stood beside Vice President Joseph R. Biden Jr. and Karen Mills, chief of the Small Business Administration, and announced a commitment to increase small-business lending by $20 billion over the following three years.
On the surface, this sounded like a terrific proposition. As always, the devil is in the details. Over the last few weeks, I have sought to understand precisely what the banks committed to doing and how much progress they are making.
Specifically, I wanted to find out:
What types of small businesses are the banks talking about? Are these truly small businesses that need capital, or are the banks including larger businesses with tens of millions of dollars of revenue? What type of loans were included in this commitment? Are the banks including credit card lending?
When a bank issues a line of credit or a business credit card, does the total amount of credit available count toward the commitment? Or is it just the amount that the customer actually uses and borrows? This is especially important because many small businesses use credit cards for convenience to get points or cash back without actually maintaining a balance.
As I set out on my research, I expected to find a consistent answer to my questions. I anticipated that when the banks and the government agreed upon this commitment, they must have specified the terms. But based on my conversations with the banks, that does not seem to have been the case.
Jim Seitz of the small business corporate communications team at Wells Fargo declined to talk specifics. “Since the S.B.A. is gathering data on an industrywide effort, we believe the focus should remain on our industry’s collective efforts, not on any individual institution,” he said. “We can say that Wells Fargo is well ahead of its commitment under this initiative.”
Bank of America did supply some numbers. “In 2011, the bank surpassed its pledge to increase new small-business lending by $1 billion over 2010 levels,” reported Don Vecchiarello of corporate communications. “Through the first half of 2012, the bank has continued this strong trend and is currently on pace to exceed its 2012 pledge by more than $1 billion.” But when asked for further clarification, the bank declined to answer.
Mary Jane Rogers of the corporate communications team at JPMorgan Chase went further. She reported that JPMorgan Chase had “increased its small-business lending by 35 percent in the first half of 2012 versus 2011.” And Ms. Rodgers was helpful in explaining what JPMorgan Chase considers the terms of its commitment to be.
Specifically, she said the commitment is for new loan originations made to companies with annual revenue of $20 million or less. She further confirmed that “our total small-business lending figures — $10 billion for the first half of 2012 — include new originations and increases to existing lines of credit. For the lines of credit, they are a combination of draw downs and total commitments.”
I then turned to the Financial Services Roundtable, a trade organization that represents the 13 member banks. “Each bank is different, and there is no universal formula for how they track the commitment,” said Scott Talbott, senior vice president of government affairs. He suggested that I speak to each bank and the S.B.A. “for the details.”
I called the S.B.A. Emily Cain, in the press office, explained that “each institution is tracking its progress against the collective commitment.” She added that, with the one-year anniversary of the commitment arriving on September 20, “A progress report on the collective commitment will be published around this date by the S.B.A.” She also said, “Each institution uses its own definition of a small business for the purpose of this commitment.”
I have spent a lot of time dealing with banks, but trying to sort this out felt different. Do you remember the last time you took a loan from a bank? In exchange for borrowing money, you accepted and signed a legal document that laid out the precise terms and conditions of the loan in black and white. When lending money, bankers generally demand precision.
So how can we bring some precision to this discussion? I have a suggestion. I would like to recommend the same methodology that my loan brokerage, Multifunding, uses to grade bank lending on our company’s Web site. There, as I have explained previously, we grade the small-business lending of every bank in America that files a call report with the Federal Deposit Insurance Corporation.
We base those grades on what we think is the best metric for tracking small-business lending: the banks’ self-reported data for loans with a balance of $1 million or less. To track the big banks’ progress toward their $20 billion lending commitment, we looked at these numbers as of June 30, 2011 (the last reporting period before the commitment was made) and compared them with June 30, 2012 (the most recent data available).
What we found was that the aggregate total of such lending for the 13 banks has actually declined by more than $2 billion over the last 12 months. For example, Wells Fargo reported that that its less-than-$1 million loans are down by more than $2.3 billion over the last 12 months. Bank of America’s total for such loans is down by more than $560 million. JPMorgan Chase’s total is up but not by the 35 percent it calculates. Given those results, it’s a little hard to see how the banks will hit their three-year commitment.
Still, the news in not all bad. According to the F.D.I.C. data, Citibank, the nation’s fourth-largest bank ranked by deposits, has increased its small-business lending by more than $1.4 billion and PNC Banks has increased its lending by more than $1 billion. We congratulate these banks for helping to lead the way. (Here’s a complete list of the banks and how they are doing.)
Using this methodology has raised objections. In a recent blog post, the financial services roundtable cited its opposition to our banking grades by noting, among other things, that big companies sometimes have loan balances that fall below $1 million.
While there is a possibility that occasionally a big company will have a loan with a balance of less than $1 million, we think it’s a fair assumption that the vast majority of these loans are small-business loans and that it’s the best indicator available. We also like the F.D.I.C. data because while it includes credit card loans, it only includes the balances, the monies actually lent. Plus, the F.D.I.C. loan data include existing loans and new loans, which means they reflect how banks are treating all of their customers, not just the new ones.
It will be interesting to see what the S.B.A. reports later this month (and we will let you know). We hope they will offer more clarity and some consistent definitions. After all, as small-business owners we should expect the same from banks as they expect from us.
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/2012/09/06/are-the-big-banks-keeping-their-commitment-to-small-businesses/?partner=rss&emc=rss
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