Monday, November 2, 2009

Credit Crunch Update (Tradecraft)

A couple years ago, I expanded my business using my home equity line of credit along with a long term, low interest credit card offer. I'm one of the lucky ones, as that's still my method of finance, although I can no longer tap either one of those sources. Credit card interest rates have tripled from that promotional offer and my HELOC is a distant memory, a mere debt to be paid off with nothing to tap. This CNN Money article explains the scenario for small businesses nowadays. Companies that have needed expansion capital in the last couple years are likely in a holding pattern at best.

There have been attempts to thaw the credit market for small businesses. The SBA ARC loan program, part of the recovery plan, was a dismal failure. I've followed this one closely, pursuing banks and finally getting an application from one. The problem was that most banks couldn't be bothered with the complex application process and the questionable government guarantees for a mere $30,000 loan. 

Like a hostile health insurance company, the government had a tendency of denying loan default claims by combing through applications for any potential discrepancy. The banks were responsible for my "pre-existing" financial conditions. The bottom line was that it wasn't worth their time. Worse, the requirements for such a loan were so stringent, that to qualify, you probably didn't need it! My interpretation of the application was that we were simultaneously doing both too well and too poorly to qualify, if that makes any sense.

Last week the government rolled out the Small Business Financing and Investment Act, version 2.0 of the Obama administrations attempt at providing loans to small businesses. It has the provision for allowing the SBA to loan directly to businesses if the banks won't cooperate. This might sound like a great idea, but having followed the SBA for the last six months, I can't say I have any confidence in their abilities to make their own loans (or tie their own shoes). At the macro level, I have no problem sending a check each month to the Department of Education for my student loans, but those loans were vetted and administered by banks for years before the government had them (although it was Citibank, which is practically the same thing).  

In their defense, the new program is supposed to be streamlined to make it easier for the banks to provide these loans. That was the major complaint, after all, so it looks to me like the government is taking advice and attacking the problem on multiple fronts. Here, we've made it easier, and if you don't give them out, we'll bypass you and do it ourselves.  The pre-existing condition problem is eliminated by providing a 100% loan guarantee, up from 90%. It doesn't absolve the banks from their due diligence. However, it might be a bigger  incentive. Like every government program, we'll have to see how this is executed.