4 Lending Innovations That May Help Small Business
By Carol Tice Edited by Dan Bova
Opinions expressed by BIZ Experiences contributors are their own.
Yesterday, I talked about federal second-round stimulus proposals, and whether they'll help unfreeze the lending markets for small business. Today, I've gathered up four other innovative ideas out there that could help small businesses, no matter what happens with Stimulus II.
1) Move Your Money. Could small business owners solve the credit crunch themselves, by changing their banking habits? Some business groups think so. A 12-year old project to encourage more small business owners to bank with local community banks is picking up steam, now that we've had a year of big banks taking federal TARP funds while remaining tight-fisted on business lending. The Institute for Local Self-Reliance's New Rules Project encourages business owners to move their money and their small-business borrowing to a local, community bank.
Citing data that shows communities with more locally controlled banks tend to have more business lending and a healthier small-business community, the Rules Project has teamed up with Move Your Money, a two-month-old initiative co-sponsored by the Huffington Post, the Roosevelt Institute, and others, that provides resources to assist companies in switching their business to a local bank. While Congress discusses how to prevent another rescue of banks deemed too big to fail, businesses could help end the era of megabanks by selecting a local financial institution.
2) Microcredit meets investment banking. American Banker magazine reports Morgan Stanley is in talks with top American microlender Accion USA to create a "unique program" to help the investment bank meet its Community Reinvestment Act obligations to serve local communities where it has operations. Details aren't yet out, but I'm familiar with Accion from years of covering microlending and it sounds like good news to me. Like most microlenders, Accion lends in amounts up to about $35,000. They will take a chance on a startup, or lend against purchase orders for big government contracts -- the types of loans banks usually won't do. And as a nonprofit, their interest rates are usually reasonable.
3) FDIC's new attitude. A small change in policy at the Federal Deposit Insurance Corp. (FDIC), which insures most American bank deposits, could give lending a boost. An statement FDIC issued earlier this month titled "Interagency Strategy for Meeting the Credit Needs of Creditworthy Small Business," the instructions here may encourage banks to lend more to small businesses.
In the two-page letter, FDIC told its examiners not to discourage small-business lending by automatically disqualifying small-business loans when the company's collateral value sinks below the owed loan balance. As long as the business has the cash flow to service the loan, they should be considered a good loan candidate. Companies in difficult industries or hard-hit geographic areas should also not be automatically ruled out for loans, FDIC said. Bankers who heard details on FDIC's instructions at an Alabama business breakfast thought the change in FDIC's attitude could help increase small-business lending.
4) Credit unions could lend more. It's not part of this year's current stimulus proposals, but separate bills are circulating in both Congressional houses that would raise limits on small-business lending at credit unions. Currently, credit unions are restricted by law to lending only 12.25 percent of their asssets at most to small business. The proposals would raise that cap to 25 percent. The Credit Union National Association says 180 credit unions are now at their limit and can't lend more unless the cap is increased. More credit-union lending could be particularly positive for small businesses as credit unions are nonprofits and generally offer lower interest rates. (Ironically, the Move Your Money database doesn't include credit unions because they aren't rated like banks.)
We'll have to see which of these ideas will be the most helpful in getting small-business lending rolling again. See any ideas you like? Hate? Have your own ideas? Let us know with a comment.
