Main Street vs. Wall Street

One year ago this week, Lehman Brothers closed its doors. Financial panic, obvious from the rapid decline of stock markets, spread like a contagion. The meltdown obviously hurt me, like many people who had much of their retirement savings loaded into equities. Of course, the panic spread when the federal government effectively took over the insurer American International Group and its mind-boggling debts a day later. But the impact the unfolding financial debacle might have on our family-run plastic packaging manufacturer didn't hit home until a day or two later, when I called our banker at Wells Fargo & Co. and asked for an increase in our credit line.

 

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Ignorant of what the financial Jericho meant, I picked the wrong week to call our bank and ask for more money. Mind you, I was only asking for access. On that fateful week we didn't have a dime withdrawn against our line of credit, so my request was really only an attempt to create additional access to capital should we need it. I didn't foresee any objections. Our balance sheet was strong, and Wells had never said no to us before. But on Sept. 17, 2008, my bank nodded its head side to side, and my confidence has never been the same.

Small businesspeople I spoke to over the past few days feel little love for their bank, or the banking system. "Every time I turn around they're raising their fees just for our business checking account," said an owner of a local box distributor, an experience that mirrors my own. Earlier this year we received a revised schedule that hiked fees on many services, including electronic banking, something that was supposed to save banks money because it cut their overhead. Now it's a profit center, or so it seems.

Fees are only one part of the problem. Several owners I spoke to talked about how difficult it has been to get loans, or how restrictive loan covenants had become. "My bank won't even talk to me," confessed the owner of one local eatery who had received a Small Business Administration loan nearly two years ago that financed an upgrade and expansion of his kitchen. Now, even with revenue growing, he can't find a bank willing to loan him money to expand further, due in part to the poor performance of the restaurant sector in general. He's still hoping to fund the expansion by negotiating longer terms from suppliers. Another friend of mine, who runs a profitable IT outsource company, was negotiating with his bank for his first line of credit, but it ended the talks with no reason given. So he's back to funding growth through his family and credit cards. But to add misery to humiliation, his higher revolving balance allowed the bank to double the interest rate it charged. "I'm glad I'm helping make the banking system more stable," he told me.

He has a point. If the banking industry has regained some traction in the past year, it has done so by restricting lending, increasing fees, and getting fat on home refinancings, along with a loosening of the rule that forced institutions to mark loans to their current market value. Lending to small businesses, as President Barack Obama noted in his Sept. 14 speech on the reform of financial-industry oversight, has dried up, with no signs of loosening in sight. In fact, it's quite the opposite. With the percentage of delinquent loans to small businesses falling slightly but still up about 18 percent over a year ago, according to PayNet Inc., a company that provides risk-management tools to the financial industry, banks show little interest in small firms.

Which leaves the public sector as the lender of last resort. Earlier this year the Small Business Administration unveiled a program called America’s Recovery Capital, which offered struggling small businesses no-interest loans of up to $35,000. The SBA guaranteed the loans, so banks wouldn't be putting their own money at risk, and to cap the deal, it offered attractive interest rates as well. But given the effort required to originate and service such small loans, few banks have rushed forward. Wells Fargo, for instance, had fielded about 17,000 calls by August, but had written only 31 loans.

Banks aren't shying away from small businesses altogether. If you have a strong balance sheet, the door is open. Fresh with money from the federal government and drunk with net income, several large banks have asked whether we'd like to borrow. That's at least in part because these banks are under pressure from the Feds to loan out some of the money it handed over to them almost a year ago as a sign that Washington stood behind our financial system. But even in our case, the spread over Treasurys being demanded by banks today compared with three years ago—at least a half percentage point higher—doesn't exactly excite my animal spirits.