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To prepare for a CNN interview on the ‘freeing up’ of small business lending, I had a very interesting discussion with:

•    Director of SBA Special Assets with a national $282 Billion Bank
•    CEO of a one branch local business bank in Washington
•    CLO of a $8.6 Billion State-wide CU in Washington State
•    Chief Risk Officer of a family-owned 17-branch bank in Oklahoma
•    30+ year business banker with a regional $ bank in Washington State

Federal Reserve Chairman Ben Bernanke had just come out with his speech (another one) about what it will take to improve availability of credit to small businesses in America.


Economy is better but is not good.

There is a lack of demand for good quality business loans.

Some loans they might have done themselves get done through SBA loans instead.

Underwriting standards may be a bit tighter, but in many cases the loan requests do not even meet the pre-recession standards. Many small and medium-size businesses have not recovered to the point that they are again credit-worthy…yet.

Examiners come into play in three ways:

1) What was well-capitalized may not be enough to satisfy examiners.
They want higher which may constrain a banks growth if they cannot raise capital. Also, banks even who are well-capitalized cannot take a chance of a bad mistake. Too costly. Thus more conservative.

2) Still want a shift to C&I from CRE. I heard from one bank CEO some regulators are also more concerned about owner-occupied CRE, not just non-owner occupied. Banks that are conservative have seen a difference…owner-occupied considered safer.

3) Emphasis, rightly so, on good credit analysis including tax returns and financial statements. If a lender is confident in a business loan but the recent numbers are not up to snuff, the lender may have less latitude in making that loan.

The impression as to whether Examiners are too restricting or not varied among the business lenders I spoke with.

The end result…the high-level regulators and the politicians say easing credit to small businesses is a key to our recovery. But the regulators visiting the banks are still very cautious and conservative.

Business bankers all said:

Credit analysis skills are more important than ever.

Understanding of business fundamentals, the ability to ask probing questions about recent and projected performance, and the ability to clearly articulate the results in a loan write-up, to loan committee and ultimately to regulators is key.

A banker from a family-owned bank said that the small banks in rural America may not make it. There will be consolidation.

The Credit Union Advantage? De Novo?

The Credit Unions may have an advantage in that many have few loans on the books to go bad but are able to capitalize on an existing relationship. Actually, the same can be said for De Novo banks.

Is it better than last December?

CNN’s Colin Barr and I talked last December. Heasked about the general sense of things in comparison to our last conversation.

I said I get the impression that business lenders feel things are improving, but there is a long way to go. There is more interest and activity, but it has not turned into enough doable loans…yet. The bank CEO said it is like we had pneumonia…and now there is a bad, lingering cough. The cough is better than pneumonia but…

Colin asked if the sort of euphoria at the beginning of the year that we had turned the corner has had an impact on business lending. I told him…

There is a series of things that have to happen:

  • A small business owner has to have confidence that the euphoria or improved consumer/business confidence will turn into increased demand for their goods or services
  • The small business owner has to translate that into projections s/he is confident in
  • The small business owner then has to come up with a plan and consider whether they have sufficient liquidity, capital or access to funds to carry it out
  • The small business owner has to articulate that plan to a business lender with enough information that the lender has confidence in the outcome
  • If recent operational history has been challenged, the business owner has to overcome low DCR or loan-to-value assumptions with compelling mitigating factors
  • If convinced, the lender has to articulate all of those things through the written write-up and presentation to loan committee (if it is over his/her lending authority)
  • Ultimately, if the loan is made, the regulators will scrutinize the decision

It is getting better…but is still painful.

Business lenders in many cases have a long-standing relationship with their borrowers. They would make the loans if they could sufficiently mitigate the risk and pass scrutiny. Not only are they in ‘business’ to lend money, they also have a commitment to their customers and their community. Thousands and thousands of minds are working hard on this problem at every level.<

Do you agree?

Or do you have a different take on what it will take?

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Linda Keith, CPA

Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis.
She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans.
Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.