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Credit Tight from SBA Lenders

Last year lending to small businesses evaporated with glaring exception of Wells Fargo which increased its lending through Small Business Administration (SBA) programs.  With bank lending to small businesses nearly frozen many small businesses are scrambling for the credit lines and loans they need to keep their companies alive.

The landscape of lenders willing to provide credit to small business is evolving.  Wells Fargo has emerged as the principal provider of credit to the small business market becoming the number-one lender through the SBA loan programs during 2009.

CIT Group, JPMorgan Chase, Banco Popular and Bank of America have cut their SBA lending by more than 70% this year.  While Wells Fargo buttressed by its acquisition of Wachovia, increased its loan volume 4%, from $583 million in 2008 to $605 million during 2009.

Wells Fargo acquisition of Wachovia closed three months into the 2009 fiscal year allowing Wells Fargo to book only nine months of Wachovia SBA lending which totaled $742 million a decrease of  24% from aggregate SBA loans extended during 2008.   During 2009 the number two lender to small businesses was U.S. Bank which made $250  million in loans through the SBA’s lending program.

The large banking institutions that received TARP funds  used that infusion to prop up the capital ratios to improve weak balance sheets.  Little of these funds were used to fund credit programs for small businesses.  Wells Fargo’s capital ratios were healthier then its larger competitors.  This allowed Wells Fargo to take advantage of their rivals distraction from the small business market.  Indeed the bankruptcy filing by CIT, the management tremors at Bank of America, Citibank’s scramble for capital and JP Morgan Chase digestion of Bear Stearns allowed Wells Fargo to fill the large vacuum in the  neglected SBA lending market.

Wells Fargo also had the advantage of not being dependent on securitizing its SBA loans and selling them in the  secondary market.  As evidenced by CIT’s bankruptcy filing,  funding for securitized loans disappeared as the risk aversion of institutional investors grew and liquidity evaporated from the market.  These market events led Wells Fargo to develop a focused discipline on the small business lending market.  The bank was committed to closing larger 7(a) SBA loans which are held and managed in the banks loan portfolio.  Wells Fargo’s small business strategy discouraged originating SBA Express Loans that offer lower credit limits and tend to have much higher default rates.  Wells Fargo’s SBA program and business model should be studied and replicated by community banks to energize small business lending.

Small business lending and capital formation in the sector is a critical component for sustainable economic growth.  Banks need to engage the small business market with a deeper understanding of the risks associated with the market.  Small business managers must demonstrate to bankers and shareholders that they are worthy stewards of credit and equity capital by implementing sound risk management and corporate governance practices.  This assures bankers that  small business managers are a good credit risk capable of building a mutually profitable business relationship for the many years to come.

Risk: SME, SBA, credit, small business, banking, community banks

March 11, 2010 Posted by | banking, bankruptsy, credit, credit crisis, recession, risk management, SME, TARP | , , , , , , , , , , , , , | Leave a comment

Mom and Pop Go Chapter 11

american-gothic-large4The Wall Street Journal ran an interesting article about the devastating effect the recession is having on family owned businesses.  The SBA estimates  90% of U.S. businesses are family-owned.  During 2008 about 4.3 million businesses with 19 or fewer employees closed according to the Bureau of Labor Statistics. If 90% of those firms were family controlled businesses more then 3.8 million families have lost their livelihoods and most likely have also lost a considerable amount of personal wealth.  This drastic dissipation of  wealth and family control of assets  is yet another blow to the middle class.  Its impact of entrepreneurial activity and capital formation initiatives may create additional headwinds for the economy seeking to overcome the deep recession.

John Ward a professor at Northwestern University observed “that the economic downturn is really just the latest setback for family-run businesses. In the 1970s and ’80s, exorbitant income taxes and estate taxes forced many to close.  Before that, the anti-establishment movement during and after the Vietnam War made many children reluctant to take over the family business.”

Beth Wood, a family business market development specialist  at MassMutual observes that family businesses are “often steeped in tradition and not as flexible to change, tend not to have formal plans in place to respond to crisis.  They’ve seen reductions in top line revenue that they just can’t react fast enough to. Problems securing credit in this recession have also prevented some family businesses from getting the funding they need.”

Ms. Wood makes an interesting observation about the importance of business agility.  The need to assess the rapidly changing market dynamics is a critical exercise that SMEs must undertake.  Business as usual will not get it done.  SMEs  must begin to transform itself to better align its business model to rapidly changing markets.  Conducting a thorough risk assessment and opportunity discovery exercise is critical  to creating a sustainable business enterprise.  Sum2’s Profit|Optimizer is a critical tool that helps SME managers assess risks, spot opportunities and initiate actions to achieve business growth and profitability.

Family owned enterprises must overcome the gravity of generational business cultures that inhibit and resist change.  SMEs will survive and thrive if they can identify emerging opportunities the current business cycle is creating.  SME’s will survive and thrive if they have the will, resourcefulness and a supportive culture to change.  These are the qualities required for long term sustainability and growth.  Business as usual is giving way to a “New Normal,” where adaptability to structural market changes are keys to asset preservation and wealth creation.

You Tube Video: Willie Nelson, On the Road Again

Risk: family trusts, asset preservation, small business, bankruptcy

October 6, 2009 Posted by | bankruptsy, business, credit, economics, product, risk management, SME, Sum2, sustainability | , , , , , , , , , , , , , , , , , , , , , , , | 4 Comments

Corporate Extinctions

A large meteor that hit the Yucatan peninsula 65 million years ago is considered one of the causal factors that led to the mass extinction of the dinosaurs. The theory gained wide acceptance after a photogemmetric satellite captured the image of the Chicxulub Crater centered just off the peninsulas northeast shore. The meteor theory seemed to solve the dinosaur extinction mystery of how a dominant species that ruled the earth for 200 million years can suddenly disappear. Apparently the theory suggests that the extinction happened more with a bang then a whimper.

Like the Chicxulub meteor, the economic crash of 2008 promises to claim a dramatic toll of corporate victims and drastically alter the landscape of the global capitalist system. The casualty list prominently includes some marquis corporate banking brands like Bear Stearns, Lehman Brothers, WAMU, Wachovia, Fannie, Freddie, Fortis, RBS, NorthernRock and threatens to claim the solvent souls of a UBS or Citibank. The State of California and the Sovereign State of Iceland are also endangered and the economic crisis may claim them as its biggest prize.

Hedge funds are quickly folding up shop. Morgan Stanley estimates that the AUM of the industry may shrink from $1.9tr to $900bn due to market losses and investor redemption and withdrawals. At its peak the global hedge fund industry was estimated to offer AIM products by over 6000 providers. By the close of the next year the size of the industry will be considerably smaller as capacity downsizes to serve less demand. Downsizing will also be the prevailing theme for community banks, RIA’s and CTA’s as excess capacity is worked out of the system through closures, consolidations and seizures. This contraction will effect industry service providers that sell services to the financial services market. Lawyers, accountants, IT providers and consultants will be hard pressed to maintain their book of business as the market for their services contracts.

Free marketeers and Social Darwinists may find it right and fitting that the financial services industry comprises the bulk of the corporate casualty list due to their culpability in nurturing this economic apocalypse and their proximity to the epicenter of the crash. The Hollow Men who led the US economic colossus to this dramatic self immolation however won’t have to fall on their swords. Their champion in the Treasury Mr. Paulson has swaddled them in a protective TARP so these masters of the universe can don superman capes to continue their selfless endeavor of saving the US economy from a total collapse.

Unfortunately the deadly meteor that almost liquidated the banking system is spreading outward to what some refer to as the real economy. Goldman Sachs’ indicates that the recession will shave a cool $1.3tr from the GDP. This will inhibit buying power by individuals, corporations and governments. Some economists fear that this will create enormous deflationary pressure prolonging the recession. Many see similarities with the Japanese recession of the 1980’s. That recession brought on by the burst of Godzilla sized real estate and equity market bubbles lasted for over a decade. Japanese central bankers cut interest rates to almost zero and the vicious downward spiral of the economy recovered as a result of SE Asian and North American market demand drivers that fueled tremendous export growth.

Retail is another sector that will be particularly hit hard by corporate failures. Industry statistics indicate that 14,000 retailers are expected to close their doors during the next year. US auto dealerships from the Big Three are expected to contract by 25%. The auto industry is a major hub of a large and intricate manufacturing supply chain and as such this sector will be hit hard with business closures as well. Construction, housing and domestic oriented leisure industries will continue to stagnate as the American consumer buying power evaporates. Not good news for an economy so strongly dependent on consumer spending.

Yesterday the National Bureau of Economic Research (NBER) announced that the economy went into a recession in December 2007. Its a bit funny that it took a year for the NBER to hear, feel and detect the Chicxulub Meteor that crashed into our economy. Today’s Employment Report from ADP indicates that the US economy shed another 250,000 jobs during the month of November. Now that the reality of the recession is upon us the corporate endangered species list will be a pressing problem and success metric that the Obama Administration will need to squarely address with any stimulus package he plans to enact to get the economy moving again. This actually bodes well for the passage of a rescue package for the Big Three Automakers. One thing is certain, urgent action is required or our economy will continue to go down not with a bang but with a whimper.

You tube video: Ranny Weeks and Orchestra: Out of Nowhere

Risk: recession, bankruptcy, solvency, rescue package, economic stimulus

December 4, 2008 Posted by | banking, bankruptsy, Bear Stearns, economics, Paulson, unemployment | , , , , | Leave a comment

Creeping Credit Crisis or Poor Risk Management?

bankruptcyI receive a daily feed from Biz Journal. One of the stories from The Triangle Business Journal was a Chapter 7 bankruptcy of CJ Woodmaster, a manufacturer and retailer of wooden furniture down in the Tar Heel State. I don’t know the details surrounding the causes of the liquidation of CJ Woodmaster other then a few quotes by attorney William Yeager, the bankruptcy counsel for the company, “Their level of debt and the limitation of getting new credit lines snuck up on them,” he says. Mr. Yeager continues to state that hundreds of customers who have paid for purchases but have yet to have their order filled will lose money. Ouch!

I began to shake my head. Aha, hard evidence of the recession and an example of contagion from the soft housing market. You don’t need furniture for houses that are not being built and consumers whose credit cards are maxed out can’t buy a sofa from CJ. Yet another example of the creeping credit crisis that prowls around like a ravenous cougar seeking some small business to devour.

Mr. Yeager goes on to offer some additional observations about CJ Woodmaster. He says he is trying to get a handle on the company’s assets and liabilities from the numerous companies set up by CJ Woodmaster and further adds that the IRS is a major creditor and that “various business units owe tens of thousands of dollars in taxes to the Internal Revenue Service. The federal tax liens date back as far as 2002″.

Now I’m not so sure that the creeping credit crisis can be blamed for this one. The few cursory observations I gleaned from this brief article suggests to me a telling breakdown in CJ’s ability to manage risk factors that eventually led to its Chapter 7 Bankruptcy filing.

Having hundreds of customers waiting for orders to be filled is a sign of a vibrant company. If CJ had that many customers and it was losing money it indicates unrealistic product prices it charged to its clients. This mispricing could be the result of an inefficient manufacturing operation or the strangulating costs associated with developing and managing distribution through a chain of retail outlets. Perhaps CJ should have decided it was either a manufacturer or distributor of furniture goods. Not both.

This assertion may be supported by additional observations made by Mr. Yeager in the article. Mr. Yeager is having difficulty getting a handle on the extent of the company’s financial condition. He blames the complexity of the company structure and apparently the numerous financial statements he must put together. This is evidence of a problem in corporate structure and governance, information management and reporting. These factors may lie at the root of CJ’s inability to determine inefficiencies in its manufacturing or distribution functions and why its integrated strategy was unprofitable.

Lastly if a company has a series of tax liens pending for five years this is a major red flag. CJ’s inability or reluctance to satisfy tax liabilities shouts a disturbing ambivalence to corporate governance. It is a disclosure that would give any potential credit provider or equity investor a strong reason to pause.

April 3, 2008 Posted by | bankruptsy, credit crisis | , , , , , , | Leave a comment