Lending Hurts Businesses
& Merchants Bank
1952, U.S. companies have borrowed eight cents
for every dollar of new investment. Since 1999,
however, that figure has skyrocketed to twenty
cents for every dollar. This borrowing-investing
balance has served the economy by fueling corporate
expansion and entrepreneurial growth, but it also
has resulted in companies struggling to repay
loans. And given the state of corporate earnings
presently, this trend is not one to subside soon.
real cloud hanging over the [banking] industry
is loan quality," said Bert Ely, an independent
counsel in Alexandria, Virginia. "If we slide
into a recession, a lot of ugly loans will float
to the surface." The faults of liberal loan policies
are beginning to be recognized in the increasing
number of "ugly loans," or loan defaults, surfacing
from the economy's downshift. As the economy flounders
and defaults rise, banks are beginning to tighten
their belts on lending. And rightly so - excessive
loan defaults bankrupt lenders.
a surprise survey conducted in March 2001 of senior
loan officers, the Fed reported that 43.4% of
banks surveyed tightened lending standards for
small businesses, with no respondents indicating
an easing of restrictions for businesses of any
size. The message to the commercial public is
clear: If you are not an extremely safe borrower,
then don't expect a loan from us. Despite this
year's dramatic drop in GDP growth, the American
economy is still growing and small businesses
still need loan financing for their capital investments.
County, in particular, needs the continued fueling
of these businesses to sustain its present growth.
But local-area banks that have spread themselves
thin by issuing too many high-risk loans cannot
afford to jeopardize their loan portfolios; meanwhile,
banks' self-imposed lending restrictions make
loans even more difficult to obtain. So, entrepreneurial
and smaller companies struggle to find the loans
necessary to get established and/or expand.
Los Angeles Business Journal recently published
one of the most thorough reports compiled on public
companies in L.A. A summary article of the study
reads: "The report …provides important insight
into Los Angeles' public enterprises and offers
tangible clues about what it will take to keep
the region's economy humming along. Foremost among
them is that, to stay healthy, Los Angeles must
become more diligent in promoting and nurturing
its small and mid-sized businesses." Applied to
the current loan situation, the Southern California
market must find a way to ensure small businesses
can obtain financing from healthy lenders if the
market strength of Los Angeles is to be maintained.
the Small Business Administration (SBA) has developed
a program to encourage small business growth in
areas like Orange and Los Angeles Counties. The
SBA 504 Loan Program provides long-term, fixed-rate
mortgage financing for acquisition and/or renovation
of capital assets. Banks usually require down
payments of 25-30% of total loan value for traditional
business loans, which mitigates bank risk but
drains needed capital from businesses.
504 Program, however, requires only 10% up-front
from the borrower. The other 90% of the loan is
financed by the lender (50%) and the local Community
Development Corporation (40%). Coupled with a
low fixed rate, qualified small businesses can
obtain loans inexpensively and efficiently, depending
on the lender they choose to broker the 504 Program.
financing split in such an advantageous way to
the borrower, one would think that more businesses
would maximize the potential of this program.
But few lenders - and even fewer borrowers - capitalize
on this lower-risk, capital-saving loan acquisition
Rated the strongest bank in
California, Farmers & Merchants Bank is a 504
SBA lender that can certify up to $3.2 million
loans for Southern California's small businesses.
For more information about participating in Orange
County's SBA 504 Loan Program, please contact
F&M Bank Vice Presidents Scott Dowds at (714)
578-1945 or Chuck Tyler at (714) 488-8411.