More good news for small businesses that might, while they are still young, see loans available again. I know you've heard this before, but I think it is rolling toward the real thing this time. The U.S. Treasury Department, as part of the Obama stimulus plan, will start loaning money to investors by March 31, 2009, as part of a bank rescue fund. Remember that as of October of 2008, according to the National Small Business Association (NSBA), the secondary market for selling small business loans froze. Now as much as 15 billion of the 700 billion in TARP money will be made available for this secondary market. The NSBA is calling for at least 3 billion of this to purchase SBA 7(a) pooled securities.
As a small business owner you may ask: "What is secondary market and why should I care about it?" Well, you should. After a bank makes a loan, it packages them in pools and sells to investors on the secondary market who purchase at a premium. So if you have $100,000 loan and it is sold at a premium of 115%, the bank gets back $115,000.. With new money into its coffers, it loans to other businesses and the cycle continues over and over again. What happened lately is the secondary market has dried up and so banks aren't loaning. With the reviving of that market, they will hopefully get down to business again.
And not a moment too soon. The SBA guaranteed loans fell 57% in the fourth quarter of 2008, from a year ago. They usually give guarantees of 20 billion a year and looks like they are heading for only 10 billion this year. Also, 48% of major SBA lenders say they have stopped making loans according to a March survey by Terry and Associates, Inc, an executive and SBA and recruiting firm. But the good news is that in the last few days, premium bids on SBA loans exceeded 105% for the first time since September 11, 2008, per govgex.com.
Of course, most of this data relates to big banks. The smaller banks which specialize in SBA loans have been less affected by this economy and are still making loans--now. That's right, there are financial institutions actually making SBA loans as we speak. He just have to find them.
So why are some people so optimistic that small business loan money will be flowing again for start-up businesses as well as existing ones that want to expand? Here are some reasons:
Why Banks Will Start Lending Within the Next Six Months
• Obama's reputation at stake. President Obama has staked his political future on being able to revive the economy, specifically rejuvenating the secondary market. He will not allow maligning of that reputation to occur. This means he and his team will be doing everything they can to breathe life once again into that market.
• The Fed is a money printing machine. We all learned this in civics class. State and local governments actually have bank accounts that have to be balanced with the influx of tax and bond monies. When they run out of money, they can't print U.S. currency. As a vast overstatement, the Federal government can print more money (subject to excessive printing which would cause massive inflation). If it runs out of money through the influx of taxes, it can simply produce more revenue by the selling of treasury bills, notes, bonds, and savings bonds. Since the U.S. public can only buy so much, they can dump these on the international market--which they have been doing for decades. So, the point is, more and more money can be dumped into the secondary market.
• The Federal deficit is an illusion. The Federal government does not balance their affairs like we do our bank accounts. Sure, the U.S. Treasury is limited to the "Debt Subject to Limit" authorized by Congress, but Congress can increase it if they wish. It simply means further generations will have longer to pay it off. That doesn't necessarily mean we all have to dig into our pockets to pay it off now. It simply means that every morning the Federal Bureau of Public Debt accounts for more deficit and "lets it roll for the future". If taxes stay relatively the same, the deficit will simply be with us longer. As of March 19, 2009, the national debt is just over 11 trillion, which equates to $36,121.40 for each American, or $3.8 billion a day (U.S. National Debt Clock; brillig.com). The point? There is nothing stopping the Administration from pumping more money into the economy which will give incentives for banks to make loans.
• The country would rather have more debt than go down the tubes. After talking or meeting with approximately 100 small businesses each day, twelve months out of the year, for seven years, I have rarely seen them as angry as with the bailout money. More accurately phrased, they are imbued with an almost seething anger approaching a "calling to arms" revolutionary mentality. I agree with them. But nothing to date has stopped Congress from continuing with the bailout which I suspect will be with us for the indefinite future.
The banker's mentality: "Wait and See-Come to Me". Bankers are obsessively conservative. They don't drive markets, the market's drive them. When the housing market exploded with new construction, refinance, and home improvement, they reacted by jumping on the bandwagon. They didn't create it. When the secondary market heats up, they will join the same parade. Especially if a competitor bank across the street is doing so. Further, banks can only make so much money with their deposits, ATM charges, and overdraft service fees. They eventually have to get back in the market of making loans which is their real bread and butter.
• Capital always find its market. There is still trillions of capital waiting to find a home in America. The Federal Reserve of New York is now making available low interest loans to investors purchasing pools of secondary market business loans. The money will be rushing in along with good old an fashioned American desire for profit. You can only hold back capital infusion for so long.
So keep your chin up kid. Capital will be coming your way. If you can just stay in a survival mode for the next few months, you'll be able to launch that new advertising campaign and hire a new sales rep. Really.
As a small business owner you may ask: "What is secondary market and why should I care about it?" Well, you should. After a bank makes a loan, it packages them in pools and sells to investors on the secondary market who purchase at a premium. So if you have $100,000 loan and it is sold at a premium of 115%, the bank gets back $115,000.. With new money into its coffers, it loans to other businesses and the cycle continues over and over again. What happened lately is the secondary market has dried up and so banks aren't loaning. With the reviving of that market, they will hopefully get down to business again.
And not a moment too soon. The SBA guaranteed loans fell 57% in the fourth quarter of 2008, from a year ago. They usually give guarantees of 20 billion a year and looks like they are heading for only 10 billion this year. Also, 48% of major SBA lenders say they have stopped making loans according to a March survey by Terry and Associates, Inc, an executive and SBA and recruiting firm. But the good news is that in the last few days, premium bids on SBA loans exceeded 105% for the first time since September 11, 2008, per govgex.com.
Of course, most of this data relates to big banks. The smaller banks which specialize in SBA loans have been less affected by this economy and are still making loans--now. That's right, there are financial institutions actually making SBA loans as we speak. He just have to find them.
So why are some people so optimistic that small business loan money will be flowing again for start-up businesses as well as existing ones that want to expand? Here are some reasons:
Why Banks Will Start Lending Within the Next Six Months
• Obama's reputation at stake. President Obama has staked his political future on being able to revive the economy, specifically rejuvenating the secondary market. He will not allow maligning of that reputation to occur. This means he and his team will be doing everything they can to breathe life once again into that market.
• The Fed is a money printing machine. We all learned this in civics class. State and local governments actually have bank accounts that have to be balanced with the influx of tax and bond monies. When they run out of money, they can't print U.S. currency. As a vast overstatement, the Federal government can print more money (subject to excessive printing which would cause massive inflation). If it runs out of money through the influx of taxes, it can simply produce more revenue by the selling of treasury bills, notes, bonds, and savings bonds. Since the U.S. public can only buy so much, they can dump these on the international market--which they have been doing for decades. So, the point is, more and more money can be dumped into the secondary market.
• The Federal deficit is an illusion. The Federal government does not balance their affairs like we do our bank accounts. Sure, the U.S. Treasury is limited to the "Debt Subject to Limit" authorized by Congress, but Congress can increase it if they wish. It simply means further generations will have longer to pay it off. That doesn't necessarily mean we all have to dig into our pockets to pay it off now. It simply means that every morning the Federal Bureau of Public Debt accounts for more deficit and "lets it roll for the future". If taxes stay relatively the same, the deficit will simply be with us longer. As of March 19, 2009, the national debt is just over 11 trillion, which equates to $36,121.40 for each American, or $3.8 billion a day (U.S. National Debt Clock; brillig.com). The point? There is nothing stopping the Administration from pumping more money into the economy which will give incentives for banks to make loans.
• The country would rather have more debt than go down the tubes. After talking or meeting with approximately 100 small businesses each day, twelve months out of the year, for seven years, I have rarely seen them as angry as with the bailout money. More accurately phrased, they are imbued with an almost seething anger approaching a "calling to arms" revolutionary mentality. I agree with them. But nothing to date has stopped Congress from continuing with the bailout which I suspect will be with us for the indefinite future.
The banker's mentality: "Wait and See-Come to Me". Bankers are obsessively conservative. They don't drive markets, the market's drive them. When the housing market exploded with new construction, refinance, and home improvement, they reacted by jumping on the bandwagon. They didn't create it. When the secondary market heats up, they will join the same parade. Especially if a competitor bank across the street is doing so. Further, banks can only make so much money with their deposits, ATM charges, and overdraft service fees. They eventually have to get back in the market of making loans which is their real bread and butter.
• Capital always find its market. There is still trillions of capital waiting to find a home in America. The Federal Reserve of New York is now making available low interest loans to investors purchasing pools of secondary market business loans. The money will be rushing in along with good old an fashioned American desire for profit. You can only hold back capital infusion for so long.
So keep your chin up kid. Capital will be coming your way. If you can just stay in a survival mode for the next few months, you'll be able to launch that new advertising campaign and hire a new sales rep. Really.
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