Many banks seem to be abandoning Main Street, while others are getting more engaged with small-business lending — one right here in Utah.
One of the consequences of the Great Recession has been the number of banks and bankers who have chosen to move upstream to bigger, and supposedly more profitable, business borrowers. There are reasons for the move, including the risky nature of small-business lending generally, the often under-collateralized nature of small-business loans, and the cost of underwriting and processing the smaller loan amounts typically associated with lending to Main Street.
Although Main Street provides two out of every three new jobs and employs half of the U.S. workforce, the smallest small businesses, the Main Street-type businesses you and I identify with, are starving for capital to grow, expand and hire.
What does "too risky" really mean?
Yes, small businesses fail and small-business lending includes a certain amount of risk. Admittedly, if I were a banker, I would likely agree that it makes a lot of sense to move upstream and look for bigger and potentially more reliable borrowers, like maybe Sears?
Charles Green, writing for the industry newsletter Coleman Report, recently reported that Sears Holding Company (what’s left of the struggling retailers Sears & Roebuck and K-Mart) is meeting with lenders this month to ask for a $1 billion loan. “Nobody laughed,” writes Green.
Despite the fact they have lost sales for the last 26 quarters (the most recent three-month losses at $200 million), Sears Holding Company will likely get a very different reaction than a similarly struggling Main Street business owner would receive. In other words, Sears likely will get the loan.
The financial meltdown that initiated the biggest economic disaster since the Great Depression taught us nothing if failing enterprises like Sears can access capital and small businesses poised to grow cannot. The prospect of bankers throwing good money after bad by lending to Sears just blows my mind.
Nevertheless, I can see how the numbers might turn a banker's head. According to the Sears Holding Company’s 2012 annual report, it had revenues of a little over $39 billion and at the publishing of the 2012 report had 2,548 retail stores — in other words, it has a little bit of collateral. Not to mention it has been around since 1893.
Respectable annual revenue? Check. Enough time in business? Check. Collateral? Check.
I’m sure the bankers will look at the last six years of lost sales and financial losses, but I’m just as confident that someone will suggest that Sears is just too big to fail. “Sears is an American institution,” they will say. “They’ve been around since 1893. Utah wasn’t even a state then.”
When the banking industry says it has an aversion to risk, and suggests that small-business owners just aren’t fundamentally credit worthy, I wonder what it is that makes the risk associated with lending to Sears and its horrible business fundamentals attractive?
- It has been losing money for years
- It can’t keep a management team
- It is shutting down stores
- Neither brand is what it once was
The broken system that handicaps small business borrowers
Although there are other sources of money for small business, community banks have an opportunity to make more capital available to Main Street, stimulate their local economies and create local jobs. They just need to make the choice to do so — as some of their colleagues are doing right now.