For all small business owners and entrepreneurs, some cold facts respecting bank loans and financing – despite all the marketing hype, the biggest banks continue to make far fewer loans to small businesses than a decade ago. That continues to mean that small business must resort to either cooperating community banks (due to numbers and volumes unable to fill the void) and/or to seek alternative far more expensive sources such as credit cards and/or other collateral lenders.
Financing for small business continues to be a critical matter of concern. Unfortunately indications, ignored by far too many, are that it may well continue into 2017.
Due to declines in new business formations, record business failures often exceeding new start-ups, tighter lending standards and higher costs, and overbearing regulatory environments small business lending remains highly unattractive for many banks. The realities simply put – there are more efficiencies less risk and greater returns in credit cards, home mortgages, auto loans, and corporate finance (far easier to package for profit than small business) all of which can be relatively easy to repackage into resale to investors.http://www.4-traders.com/BANK-OF-AMERICA-CORP-11751/news/Big-Banks-Cut-Back-On-Small-Business-21474309/
Small businesses get fewer loans from banks and often must turn to alternative lenders (all varieties) with significantly higher rates/costs. E.g., http://www.wsj.com/articles/big-banks-cut-back-on-small-business-1448586637
It’s a rather simple and straight precept: Without timely and reasonably gauged costs for business financing there exist eventually only two options: (1) business failures (already at record levels and continuing) and/or (2) higher costs for capital which translate into lessened profit margins and vulnerabilities for failure for other reasons (risks increase across the board).
Although prospective changes in governmental policies and market conditions are certainly desired, optimism and hope do not fill business coffers. It takes direct and focused action. The real effects of any such major changes might well take awhile within all markets. In the interim one has to deal with the present conditions which are not favorable from most risk perspectives.
“Three-fourths of the mistakes a man makes are made because he does not really know the things he thinks he knows”. James Bryce
Generally unnoticed within all of small business is a slowly evolving development that has remained in the shadows but which will in due course rear its ugly head.
The Financial Accounting Standards Board (FASB) has issued an Accounting Standards Update (ASU) on the measurement of credit losses that will affect all banks and small business, both as to credit access and costs for financing. http://fasb.org/cs/ContentServer?c=FASBContent_C&pagename=FASB%2FFASBContent_C%2FNewsPage&cid=1176168232900; see also http://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176167771938; further at http://www.journalofaccountancy.com/news/2016/jul/how-fasb-credit-loss-standard-affects-banks-201614873.html; http://www.fasb.org/jsp/FASB/Document_C/DocumentPage?cid=1176168232528&acceptedDisclaimer=true
Opposed by the Credit Union National Association (CUNA), the Independent Community Bankers of America (ICBA) and others its impacts could significantly impede and seriously harm bank lending across the board:
“Irreversibly damage community banks’ and credit unions’ ability to continue to adequately serve their customers/members and communities and sustain the economic recovery,” http://news.cuna.org/articles/108654-cuna-icba-ask-hill-to-rein-in-fasb-on-impairment-plan
The loan-loss model would require all banks to set aside expected losses, calculated based on historical loss rates, for every loan they make “as soon as the loan goes on the balance sheet” instead of the current practice which does not occur until a loan starts to “go south”.
Projected impacts: Increased costs (automatic flow through to all borrowers in the form of new fees and/or increased interest components), shortened loan maturities, and far stricter loan compliance terms and conditions – all adversely affecting small business.
Although the new standards are to phased in over time up 2019, one aspect should be readily apparent – increased reserves by banks means less money to lend, tighter credit standards, and higher costs for small business. This is a trend that banks will be starting to incorporate by 2017 and onward.
Coupled with prospects in 2017 for almost certain reversals from prior years politically influenced low cost Fed policies, interest rate increases could also seriously affect and compound access for business financing – all prime areas for concern for small business.
What remedies? Knowledge and informed preparation are highly recommended areas for immediate and renewed focused concentration.
“An investment in knowledge always pays the best interest”. Benjamin Franklin
(Author Profile: Woodrow D. Wollesen, recognized national small business financing expert, military veteran; former US SBA Small Business Financing Champion, (8 years as Board Member, Executive Officer, Instructor with the prestigious National Women’s Business Center, Washington, DC; NWBC 2005 Man of the Year, founder/chairman of Operation Veteran Empowerment (Ultimate Financing Guide – the only complete business financing encyclopedia in the country) See http://www.ultimatefinancingguide.com/
http://www.operationveteranempowerment.com/ http://www.opvetempower.com ; see also more extensive background profile at http://www.ultimatefinancingguide.com/about-the-author/;