Many people are increasingly suspicious as to when, if any, banks will again make small business loans. After all, TARP issued blank checks to the 21 major banks of $350 billion and we never saw a dime going toward loans. This was at a crucial juncture in our economy when 28 million small businesses were floundering and desperately needed the funds. So let us get to the bottom line: when can we expect the money to flow again? I have good news and bad news. The good news is we are seeing a gradual opening up of credit markets, but the bad news is we still have a ways to go.
Is lending up in recent months? That is an easy one. Most people surmise the financial freeze is thawing. Let me throw some facts your way. Small Business SBA lending is up this fiscal year (September 2009 to October 2010). As of March, the number of 7(a) loans (the workhorse loan program of the SBA) are up 48% and the dollar amount rose 116%. The average weekly average of loans has climbed 86% higher compared with the last fiscal year.
So why is this happening and is there any chance of it increasing even more? Absolutely. This is based upon how lenders make money.
How banks make money. Putting aside checking account fees, ATM access fees, and over- draft costs, (which lately have been a staple of bank profit), banks were put on this earth to make money by making loans. We all learned how the system works in high school. After a bank satisfies the reserve requirements of the Federal Reserve (say between 10 and 15% of the money retained for the cash needs of withdrawing customers) they loan out money at higher interest rates than they are paying their depositors. Mathematically, a very simple formula. Hypothetically, pay a depositor 3% and loan out at 9%.
But it is even better. When banks are loaning, they literally receive money out of thin air. Much like the self-perpetuating machines we all dreamed of in lab class that can produce energy out of nothing. For this reason, there is a great incentive for banks to start loaning again.
Here is a simple example. Joe deposits $100 in ABC bank. The bank retains $10 as a Federal reserve requirement. It then loans to Kathy $90. She keeps it in her account. The bank then loans to Fred $81, after retaining back $9 in reserve. Overnight, there is now a total of $271 in accounts when there was only $100 to begin with. You can imagine how much money the lender can disburse if they keep churning these deposits. They continue to make interest and get this fresh flow of capital. It is like a legalized Ponzi scheme. Everything works just fine if businesses are making deposits, the loans continue, and people are paying back those loans. But if the loans become toxic and are not paid back, together with people now demanding all their money from the deposits, the bank will collapse like a cheap house of cards. That is exactly what happened in the recent financial meltdown.
But here is the good news. Since the economy is starting to recover, we know for certain banks will start loaning again–they have to do make a profit.
Are loans are available now? They sure are. There are over 117 licensed SBA lenders who specialize in quick and easy small $5,000 to $25,000 loans. The paperwork is abbreviated and the funding process is accelerated to approximately 14 days. Because these loans are monitored by the Federal government, they are currently at $60 per month, principal and interest, for every $5,000 borrowed. When you are speaking with your banker, mention the SBA Community Express Loan Program. Don’t fall off your collective chairs, but there are lenders really entertaining these loans. Good luck. It can only get better.
About the Author:
Sue Brinck is a lender who has helped start-ups and established business with their capital needs for over 7 years;the Nations #1 SBA funder with over 27,000 completed loans. Would you like a free consultation to improve the chances of receiving a loan? Call Sue at (925) 899-8449. To Apply Online for a 7.75% loan with an answer in 15 minutes ($60/month for every $5,000 with no financials), visit: http://StrategiesForSmallBusiness.com .