Despite the fact that lenders say they are opening their coffers to the borrowing public, loan balances have been declining. Commercial loans have increased somewhat, but overall small business still needs money and is not receiving it.
Banks have said they are increasing so-called asset based lending, in which credit is extended to businesses against collateral, but in this day and age who has collateral worth leveraging? A number of years ago business owners might have put up homes as collateral, but again, with the housing market being what it is, most home owners are upside down on their mortgage if not in danger of losing their property! That takes us directly back to the fact that only those who have exceptionally good credit and have remained on an even keel during these economically challenging times will likely receive loans.
We don’t have to take on faith what is said in the news; we can do the research on our own. Working with information obtained from the FDIC, one company made comparisons of different financial institutions’ standings based on their deposit to loan ratio. This is the breakdown:
- A grade (Excellent): a bank uses 25% or more of its deposits to make small business loans.
- B grade (Good): a bank uses between 10% and 25% of its deposits to make small business loans.
- C grade (Average): a bank uses between 6% and 10% of its deposits to make small business loans.
- D grade (Poor): a bank uses between 3% and 6% of its deposits to make small business loans.
- F grade (Failing): a bank that uses under 3% of its deposits to make small business loans.
Using San Diego as a base of comparison this is what was arrived at (please note that all branches of each bank were considered and each branch has the same rating as all its other branches):
Only 10 banks, out of 200+ banks surveyed in San Diego, received an “A” rating, three of which had an additional branch, bringing the number of individual banks down to 7. All of them are local California Banks.
10 Banks, not including branches received a “B” rating.
The “C” rating group also comprises 7 banks with 42 branches all told.
The “D” contingent contains only two banks and their respective branches. One is a local San Diego Bank purporting to support its community and the other a very well-known national bank with 43 locations in San Diego.
As we drop down into a failing grade, we see some of the most prominent national banks that have deposits in the billions and lend only about 2% of their wealth. Granted 2% of billions is still a substantial amount, but considering what they could be lending, this sum pales into insignificance. Imagine the financial help they could be offering to small business even if the only loaned at the “B” or “C” level.
Since banks in general are not stepping up to the financial plate, small business owners are having to turn to alternate financing sources. These companies provide short-term working capital loans based on cash flow. For companies requiring business equipment, there are Equipment Leasing and Financing programs. In a pinch there are even Business Cash Advance programs whereby merchants can acquire funding.
This may seem somewhat overwhelming especially if your bank happens to fall in the lower ranks. If you have questions or would like more information, contact the Financial Specialists at: