According to American Banker, banks might actually be getting back to commercial lending. Credit checks are up 5% – 10% this quarter over last year (Paynet Inc.). Whether this means banks are looking to make loans or small business owners are strapped for cash (or both), it does means that financial institutions are doing more diligent credit research. Kenneth Lewis from Bank of America says, “We’re in a recession, which means that demand for credit is lower, and credit standards are tighter. But that doesn’t mean ‘banks aren’t lending.’ In fact, we’re out there in the marketplace making every good loan we can, growing our relationships with existing customers and creating new ones.”
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This week the government announced that the Treasury will spend $15 billion buying back securities made up of packaged SBA loans.
A lot has been written about the limited access to credit for small businesses. This particular move is intended to free up capital for banks to make more loans.
Yet Matt Bandyk of the US News and World Report pointed out that this may only make a marginal difference in the small business credit crunch because SBA lending is such a small piece of the market.
According to the February Discover Small Business Watch Survey, 90 percent of small-business owners have never applied for an SBA loan. Even if SBA loans became easier to get, 58 percent said they still wouldn’t be interested in SBA loans.
If small businesses aren’t looking for SBA loans, maybe the government should consider how to make SBA loans more attractive to the borrower. If not, freeing up available capital may not be enough.
The page one article in today’s Atlanta Journal-Constitution tells the story of 600 plus creditors of Peanut Corp. of America probably getting “cents on the dollar” due the bankruptcy of the company. These creditors range from large manufacturers of food product to small growers of peanuts. (I started to say “small peanut growers,” but that opens questions of ambiguity and charges of being redundant!)
This is not the usual bankruptcy that one might have predicted from a decline in the financial condition of the company. This bankruptcy was reportedly caused by the company’s lax enforcement of sanitation practices that resulted in salmonella contanimation, something not visible even if one used a microscope on the financial statements.
Whether financial or bacterial in cause, the result is the same — the unsecured creditors who provided much of the capital for this company are simply out of luck.
What can a company do to protect itself from this risk of customer failure? Traditionally, there were three solutions:
- Require payment in advance or on a credit card, which the CFO likes but the sales team hates;
- Do a really good job of credit decisioning on each potential customer, which is time conuming, requires skills most companies do not have, and will not spot all problems; or
- Buy credit insurance.
The third option, buy credit insurance, is a good option for large companies, but not really an option that is availabile for most smaller companies. And, today, most of the credit insurance carriers are not writing coverage for new clients.
A fourth alternative is now available: Trade Credit Express from FTRANS, which enables a B2B seller to outsource much of the credit administraiton and payment risk of operating an in-house credit system, and be paid for invoices in 5 days rather than 50.
The need to protect your company from the financial failure of your customers has never been greater. And, the economy will probably get worse, but more on that later. Meanwhile, I continue to look at the jars of peanut butter on the store shelves and wonder if they are safe to eat. And, I continue to be proud of the the fact that if an FTRANS client had sold to Peanut Corp., their loss would be minimal.
At the beginning of the recession, access to capital was limited for small businesses due to restricted lending from banks. Today, “limited” is a far too limited description. SMBs in the United States are going bankrupt everyday; check out this article from the Miami Herald about a businesses in South Florida.