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Lending to small US businesses in downturn
November 18, 2009, Wednesday
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IN mid-October, US President Barack Obama moved to raise the amount of credit extended to small businesses.
If Congress approves his plan, the measures would enable community banks to borrow at low rates from the Treasury Department's Troubled Asset Relief Program (TARP).
The relief could not come a moment too soon. The job-creation engine known as small business has been slammed, not only because of falling demand but also because the normal flow of financing has slowed to a trickle.
Small enterprises have created two-thirds of all new jobs since 1994 and they employ more than half of all private-sector employees. (A small enterprise usually refers to "an independent business having fewer than 500 employees.)
In September, for the second straight month, they laid off more workers than mid-sized or large employers.
Prior to August, small businesses had never been the biggest source of layoffs, according to employee payment and data firm ADP, which began tracking the figures in 2001.
Last month, a survey by the National Federation of Independent Business (NFIB) found that expansion plans for small enterprises were at a 35-year low.
That's no surprise, given that their usual sources of borrowing - banks, government-secured financing, venture capitalists and credit cards - are far more limited than a couple of years ago.
The good news is that some tentative signs of improvement are turning up.
Wharton lecturer and small business expert Robert Chalfin, for example, notes that "community banks are still lending."
According to the Bureau of Labor Statistics and the American Bankers Association, community bank loans to small businesses are only down slightly in 2009 to about US$680 billion outstanding, from about US$700 billion in 2007.
Community banks provided more than half of all loans to small business this year, and presumably they will be more active if the President's latest proposal involving low-interest TARP funds gets approved. (For that program, "community banks" are defined as having less than US$1 billion in assets).
In general, however, lenders are much more conservative and more cautious. "They want the business owners to contribute equity into the deal. They're doing more reference checking, asking for more collateral, such as mortgages," says Chalfin.
According to Wharton management professor Raffi Amit, online businesses featuring social networking and other Web 2.0 platforms are likely to be able to raise money faster and on better terms than other sectors.
Online organizations will have an easier time "because in principle, they require much less cash so you will be cash flow neutral or positive after investing less capital," says Amit. "
Another sector with a better track record for securing loans is clean energy, primarily because the government is making it attractive by providing incentives in order to reduce emissions and energy dependency on other countries.
(Reproduced with permission from Knowledge@Wharton. http://knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
If Congress approves his plan, the measures would enable community banks to borrow at low rates from the Treasury Department's Troubled Asset Relief Program (TARP).
The relief could not come a moment too soon. The job-creation engine known as small business has been slammed, not only because of falling demand but also because the normal flow of financing has slowed to a trickle.
Small enterprises have created two-thirds of all new jobs since 1994 and they employ more than half of all private-sector employees. (A small enterprise usually refers to "an independent business having fewer than 500 employees.)
In September, for the second straight month, they laid off more workers than mid-sized or large employers.
Prior to August, small businesses had never been the biggest source of layoffs, according to employee payment and data firm ADP, which began tracking the figures in 2001.
Last month, a survey by the National Federation of Independent Business (NFIB) found that expansion plans for small enterprises were at a 35-year low.
That's no surprise, given that their usual sources of borrowing - banks, government-secured financing, venture capitalists and credit cards - are far more limited than a couple of years ago.
The good news is that some tentative signs of improvement are turning up.
Wharton lecturer and small business expert Robert Chalfin, for example, notes that "community banks are still lending."
According to the Bureau of Labor Statistics and the American Bankers Association, community bank loans to small businesses are only down slightly in 2009 to about US$680 billion outstanding, from about US$700 billion in 2007.
Community banks provided more than half of all loans to small business this year, and presumably they will be more active if the President's latest proposal involving low-interest TARP funds gets approved. (For that program, "community banks" are defined as having less than US$1 billion in assets).
In general, however, lenders are much more conservative and more cautious. "They want the business owners to contribute equity into the deal. They're doing more reference checking, asking for more collateral, such as mortgages," says Chalfin.
According to Wharton management professor Raffi Amit, online businesses featuring social networking and other Web 2.0 platforms are likely to be able to raise money faster and on better terms than other sectors.
Online organizations will have an easier time "because in principle, they require much less cash so you will be cash flow neutral or positive after investing less capital," says Amit. "
Another sector with a better track record for securing loans is clean energy, primarily because the government is making it attractive by providing incentives in order to reduce emissions and energy dependency on other countries.
(Reproduced with permission from Knowledge@Wharton. http://knowledgeatwharton.com.cn. Trustees of the University of Pennsylvania. All rights reserved. Shanghai Daily condensed the article.)
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