Business lending: Either you’re hot or you’re not

As published in a recent post by the San Francisco Business Times written by Mark Calvey entrepreneurs who are looking for funds are either welcomed by many bankers or completely left out in the market. On the one hand some entrepreneurs have to reject multiple bankers who are eager to lend. On the other hand some entrepreneurs end up going to pawnshop as a way of alternative financing. Approximately 49% of small business owners said that finding access to funds is a problem as bankers have always viewed them as the riskiest of borrowers.

Business lending: Either you’re hot or you’re not

First National Bank of Northern California CEO Tom McGraw has said business lending at least for some is a “borrower’s market.”

Business owners seeking loans are either warmly welcomed by a multitude of bankers or left completely out in the cold.

From what I hear from bankers business owners and a range of others involved in financing business lending these days is a clear case of the haves vs. the have-nots. The former group has to fight off bankers eager to lend. The latter which include many small businesses can’t get a nibble.

Before we blame lenders for being too strict with their lending standards I recall Wells Fargo (NYSE: WFC) CEO John Stumpf telling a San Francisco audience in the wake of the financial meltdown that potential borrowers complained about his bank’s loan rules and documentation requirements. “I didn’t have to do this at my last bank” Stumpf recalled these potential borrowers saying. To which Stump said he’d ask them “Where’s your last bank today?”

So prudence has its place in lending. But it’s hard to square what the two sides are saying today. On one hand the competition to lend to creditworthy businesses looks to be overheating.

In March I wrote about the state of business lending which was described then as a “borrower’s market” by Tom McGraw CEO of First National Bank of Northern California. (OTCBB: FNBG)

J.P. Morgan Chase’s (NYSE: JPM) Doug Petno chief executive of commercial banking was even more forceful in speaking with bank investors at the time calling some loans “irrational.”

“We’ve seen some irrational behavior in our view in terms of structure and price” Petno said adding that his team held quarterly meetings to discuss the industry’s “crazy transactions.”

On the other side of the fence are business owners complaining about having trouble getting loans.

That includes some of the smallest businesses which bankers likely view as among the riskiest. Almost half 47 percent of small business owners say that access to credit is a problem according to a national poll released this week by the American Sustainable Business Council and the California Association for Micro Enterprise Opportunity. In California and the rest of the West 49 percent of respondents said credit access is a problem.

“It’s a serious problem for the economy that almost half of very small businesses still face a credit crunch five years after the financial crisis” said Richard Eidlin director for public policy at the American Sustainable Business Council.

As if to drive home that point was last week’s pitch by the publicist for online pawnshop which is led by CEO George Souri.

Spokesman Bill Ames says small businesses having trouble accessing credit are turning to alternative sources of financing. Like the pawnshop.

“Many consumers and small businesses in the easy credit days prior to 2008 had acquired significant hard assets that they continue to own: anything from fine jewelry to heavy equipment” Ames tells me.

While the have-nots are looking up the address for the nearest pawnshop regulators are nervous that loan terms are getting too easy for other borrowers.

Last week the Wall Street Journal reported that bank regulators are taking a closer look at the terms and covenants on business loans. Bank examiners are taking a closer look at the loan docs to determine credit standards and underwriting than they have in years the newspaper reported.

That development reminds me of the comments made by FDIC Vice Chairman Tom Hoenig last February at a San Francisco media breakfast sponsored by Bloomberg News. At the breakfast reporters asked him about the state of business lending and whether it signaled trouble ahead.

“The fact that you’re talking about it means you have something going on” he said. “I call it the leverage up. Leverage is building.”

Hoenig expressed concern at that time over rising land values and the amount of capital pouring into riskier loans saying that easy lending could eventually lead to a bubble.

“If you know for sure you’re in a bubble it’s too late” Hoenig said.

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