Saturday, September 20, 2014 09:56am
North Adams, MA now: 55 °   
Send news, tips, press releases and questions to info@iBerkshires.com
The Berkshires online guide to events, news and Berkshire County community information.
SIGN IN | REGISTER NOW   

Home About Archives RSS Feed
The Independent Investor: Why Banks Won't Lend
By: Bill Schmick On: 02:28PM / Friday April 29, 2011
Important
0
Interesting
0
Funny
0
Awesome
0
Infuriating
0
Ridiculous
0

Then we'd own those banks of marble,
With a guard at every door;
And we'd share those vaults of silver,
That we have sweated for

"Banks are made of Marble" by Pete Seeger

Over the last few years, the Federal Reserve has practically given money away to any entity that calls itself a bank. Individual states are also trying, but so far the banks have just been hoarding this growing pile of cash instead of loaning it out. Why?

Two reasons come to mind: Banks are afraid of taking on lending risk. Burnt by the subprime mortgage debacle, they are now overly cautious on who they lend to in an economic recovery they are not sure is here to stay. Two, interest rates are at historical lows. If rates start to rise, loans made today could turn to losses fairly quickly.

Recently, state Treasurer Steven Grossman of Massachusetts announced a plan to give banks $100 million to deposit into local community banks for the express purpose of lending to small businesses. The money is part of a statewide effort called the Small Business Banking Partnership. The announcement has been met with some resistance within the banking community. Bankers claim it's not needed because small businesses aren't interested in borrowing due to the poor economy.

That's bad news because small businesses employ the vast majority of workers in this country and pay the most taxes. They are the backbone of this country's economy. Over the last year, small business lending has become a political football since the establishment of the $1.5 billion State Small Business Credit Initiative by the Obama Administration. The plan calls for the banking community to pony up $10 in new loans for every $1 of loans by the state government. Since then, banks and their lobbyists have gone out of their way to show how much lending they are doing to small businesses.

For example, in Massachusetts, as in other states, community banks account for as much as 80 percent of small business lending and that trend has increased through the recession, according to the state's banking association. They claim the amount of lending has also almost doubled in the last six years.

What they don't mention is a lot of that recent growth was in picking up old loans that out of state and money center banks had dumped or would not renew due to the recession and heightened credit risk. A recent survey of members of the International Franchise Association contradicts some of the data coming out of the financial lending sector. The survey revealed that 39 percent of the franchisors report that more than half of their franchisees and prospects are unable to obtain needed financing, which is up 33 percent from a survey taken last year.

"There are several businessmen right here in the county who want to open franchises with me but can't get loans from local banks," says a successful fast-food chain entrepreneur in Berkshire County. "The banks sent them packing to the SBA for help."

The bankers' argument that businesses are not growing and aren't applying for new loans is disputed by the small-business owners I talk to.

"What they aren't telling you is the hoops a small-business owner has to jump through in order to get that new loan," says the head of a large excavating company in the region.

"They want collateral and a lot of it. They want you to sign your life away, and none of that matters unless you are making tons of income as well. And once I pass all their risk criteria, I get the privilege of borrowing short term from them at 8-9 percent when the prime rate is 3.25 percent."

Given that most banks are paying under 1 percent for money to loan, one would think that a 7-8 percent spread should bring in plenty of profits. That is one of the main reasons that the Federal Reserve has been keeping interest rates at historical lows for so long. So far it hasn’t worked.

And speaking of the Fed and the end of QE II in June, most everyone (including the banks), are expecting interest rates to rise in the second half of this year. Few bankers have the appetite to lend money to a small business when they expect rates to rise. And if they do, they only want to lend for a short period of time.

"That's also difficult for a small business to handle," explains the excavator, "if I have to go back to the bank in three years, I can't do long range planning. I can't even be sure I'll get a new loan and if so, at what price. It makes being a small business owner that much more uncertain."

Grossman plans to come to Pittsfield sometime in May to discuss the state's funding initiative with local bankers. I think it would be a good idea to meet with small-business owners as well. That way he would be able to hear their side of the story before leaving town.

Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net. Visit www.afewdollarsmore.com for more of Bill's insights.



Tags: banks, QEII, franchise, lending      
News Headlines
Lenox Briefs: Electric Group Purchasing Rate Chosen; OPEB Committee Being Formed
Last of Pittsfield Parks Bossidy Bucks Spent on Backstops
Campers Filling Field for Annual FreshGrass Festival
Cheshire Property Tax Rate Rising for 2015
Clark Offers Special Free Hours for Magna Carta Exhibit
Two Fundraisers Planned For Local Girl's Walk to Cure Diabetes Team
KJ's Dance With Me Enrolling Students
'The Drop': Tells a Low-Down Tale
North Adams Happenings: Sept. 17-23
Children's Etiquette Classes Scheduled
Bill Schmick is registered as an investment advisor representative and portfolio manager with Berkshire Money Management (BMM), managing over $200 million for investors in the Berkshires. Bill’s forecasts and opinions are purely his own and do not necessarily represent the views of BMM. None of his commentary is or should be considered investment advice. Anyone seeking individualized investment advice should contact a qualified investment adviser. None of the information presented in this article is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com Visit www.afewdollarsmore.com for more of Bill’s insights.

 

 

 



Categories:
@theMarket (144)
Independent Investor (196)
Archives:
September 2014 (3)
September 2013 (2)
August 2014 (7)
July 2014 (2)
June 2014 (6)
May 2014 (9)
April 2014 (8)
March 2014 (6)
February 2014 (6)
January 2014 (7)
December 2013 (8)
November 2013 (7)
October 2013 (6)
Tags:
Markets Recession Fiscal Cliff Economy Fed Debt Ceiling Selloff Energy Pullback Europe Congress Euro Stock Market Bailout Interest Rates Banks Stocks Crisis Stimulus Europe Japan Metals Debt Housing Rally Commodities Oil Taxes Deficit Retirement Election Currency Jobs Greece Federal Reserve
Popular Entries:
The Independent Investor: Understanding the Foreclosure Scandal
The Independent Investor: Don't Fight the Fed
The Independent Investor: Does Cash Mean Currencies?
@theMarket: QE II Supports the Markets
@theMarket: Markets Are Going Higher
The Independent Investor: General Motors — Back to the Future
The Independent Investor: How Will Wall Street II Play on Main Street?
The Independent Investor: Will the Municipal Bond Massacre Continue?
@theMarket: Economy Sputters, Stocks Stutter
The Independent Investor: Why Are Interest Rates Rising?
Recent Entries:
@theMarket: Waiting on the Fed
The Independent Investor: The United States of Scotland?
The Independent Investor: Europe Follows the U.S. lead
@theMarket: What's Up With Bonds?
The Independent Investor: Baby Boomers and Retirement
@theMarket: Labor on Their Mind
The Independent Investor: Financing ISIS
@theMarket: Geopolitical Risk Trumps Economic Growth
The Independent Investor: Beware the Russian Bear
The Independent Investor: Why Some Corporations Are Leaving America


View All
Girls Soccer: Lenox vs Hoosac
Hoosac Valley posts an 8-2 win over Lenox.
Walk a Mile at 3rd Thursday
The annual Walk a Mile in Her Shoes, kicking of September's...
Barrington Stage BYP Social
Berkshire Young Professionals were at the Barrington Stage...
Soccer: Wahconah vs...
The Pittsfield boys’ soccer team had the complete package...
Soccer: Taconic vs Drury
Drury boys soccer 3-1 loss to Taconic, Wednesday afternoon....
Golf: Monument vs Mount...
Two standout rounds for Mount Greylock and one standup move...
Volleyball: Lee vs Mount...
Lee 3, Mount Greylock 0, The visiting Wildcats won 25-23,...
Soccer: Mount Greylock vs...
Eric Hirsch scored twice and set up two goals to lead the...
Josh Billings RunAground 2014
The team from Pittsfield's Allen Heights Veterinary won the...
Football: Amherst vs Williams
Football: Amherst vs Williams in a scrimmage on Saturday...
Girls Soccer: Drury vs...
Taconic girls soccer team took a 3-2 win over Drury on...
Football: Wahconah vs...
The Wahconah Warriors tamed the Chicopee Colts 44-6 at home...
Football: Taconic vs...
The Taconic Braves ran over the Cathedral Panthers 20-8 at...
Youth Center Chair Reception...
Inspired seating was on display Saturday night in the...
Volleyball: Mount Greylock vs...
Mount Greylock bested Wahconah 3-2 on Wednesday night at...
Northern Berkshire Food Fest...
Hundreds flocked to Main Street on Sunday for the annual...
Girls Soccer: Lenox vs Hoosac
Hoosac Valley posts an 8-2 win over Lenox.
Walk a Mile at 3rd Thursday
The annual Walk a Mile in Her Shoes, kicking of September's...
Barrington Stage BYP Social
Berkshire Young Professionals were at the Barrington Stage...
Soccer: Wahconah vs...
The Pittsfield boys’ soccer team had the complete package...
Soccer: Taconic vs Drury
Drury boys soccer 3-1 loss to Taconic, Wednesday afternoon....
| Home | A & E | Business | Community News | Dining | Real Estate | Schools | Sports & Outdoors | Berkshires Weather | Weddings
Advertise | Recommend This Page | Help Contact Us | Privacy Policy| User Agreement
iBerkshires.com is owned and operated by: Boxcar Media 102 Main Street, North Adams, MA 01247 -- T. 413-663-3384 F.413-664-4251
© 2000 Boxcar Media LLC - All rights reserved