We all have images of commercial bankers — gray-suited men with an accountant’s charm and the conscience of an undertaker. Bankers used to be common; with their limited work hours, they were first at the Friday afternoon martini bar and to tee-off on Saturday morning. However, it is unlikely that you’ve seen a banker for some time. They’re an endangered species, replaced by cheery, underpaid branch managers who could just as easily be the manager of a McDonald’s. Banks don’t need bankers anymore.
Sure, when you buy a car you get a loan, but it is likely from a finance company affiliated with your car maker. There are no bankers involved. Need a school loan? The federal government is your direct source for loans. Buying a house? The loan will be arranged through a mortgage broker who will come to your house to do paperwork. There may be a bank involved but only as a collector; there is a 95% chance that the U.S. government, through Fannie or Freddie, will fund your loan. If a farmer needs a loan for equipment, material, or expansion, the Department of Agriculture has a program. Need a small business loan? The branch manager will arrange a visit with an SBA specialist to help you fill out forms. Any loan you receive will be largely guaranteed by Uncle Sam.
Per the Small Business Administration, loans of $62.6 billion were made to small businesses under SBA programs in fiscal 2011. This is up 41% from the $44.5 billion loaned in 2010 and a whopping 135% from the $26.6 billion lent in 2009. These loans were made while overall small business lending was falling dramatically.
The SBA’s share of overall small business lending likely exceeds 10% of overall small business credit currently outstanding, up from under 4% in 2009, and this share is still growing. At this pace, SBA lending could exceed $140 billion by 2013, perhaps as much as 25% of total small business credit outstanding. This may seem implausible, but one need only look to Fannie Mae and Freddie Mac to see just how government programs can quickly supplant private lending. In addition, it is highly likely that banks are steering customers with higher risk profiles into the government guarantee program, while keeping the “better” customers for their own portfolios. So not only is the federal government taking on a larger proportion of lending, it is also taking on a disproportionate level of risk.
The majority of small business loans are still made outside of federal programs, but traditional credit line options are fast becoming obsolete. Awkward, inflexible, and expensive asset based loans, once considered the funding source of last resort, are becoming the norm in the private small business lending market. And the movement of credit risk from private banks to the federal government has been in large part a circular migration, a direct reflection of regulatory oversight and misguided directives. A bank’s loan portfolio is the primary subject of regulatory scrutiny. But not only are bank regulators concerned with the financial health of underlying borrowers, they are also concerned with race, address, national origin, gender, etc., factors that have nothing to do with financial qualification. Banks are penalized for lending to poor credit risks while at the same time criticized for not lending to the economically disadvantaged. Left with a Hobson’s choice, it is not surprising to see that banks have retrenched and that the federal government has filled the void.
Small business lending should be based upon the merits of the venture and the credibility of the entrepreneur. The banker’s judgment and relationship with the borrower are key factors in the decision to lend, in the allocation of capital, in the ongoing evaluation of risk, and in the venture’s ultimate success. A banker is the entrepreneur’s intimate partner, joined in the success or failure of the venture. It is in the bank’s interest to keep a close watch on a company’s progress and to maintain a friendly relationship for future loans, other services, and referrals.
The heavy hand of the federal government in lending is eroding this important lender/borrower relationship, and as a result what should be a valuable, economic symbiosis has been largely diminished. It has been supplanted with government guarantees, forms, and formulas, and limited by law, by the imagination of bureaucracy, and subject to the appropriation of funds by a grossly indebted national government.
Let’s face the fact that government has no incentive to be a good, instructive lender in a mutually beneficial relationship. If a bureaucrat makes a bad loan, it is a statistic. If a banker makes a bad loan, a job is at stake.
We need a plan to remove bankers from the endangered species list and to bring commercial lending back into the private economy. Let small business compete for private funds. The best will find capital and thrive — with the help of a friendly banker.