The statement on lending policies was issued jointly by the Federal Deposit Insurance Corporation, the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, the National Credit Union Administration and the Conference of State Bank Supervisors. Its official title is the “Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers.”

There’s a lot of finger-wagging in the statement that chastises banks for refusing to lend to “sound small business borrowers.” Along with that, the regulatory agencies took an understanding tone by noting that many banks tightened up in response to fears that regulatory auditors would hammer lenders for granting too many loans. So here comes the key part of the statement:

“[Federal and state] bank examiners will not criticize institutions for working in a prudent and constructive manner with small business borrowers.”

Translation: Use traditional formulas and practices to determine who’s qualified for loans. Then write loans to those qualified people. We won’t second-guess you if some of the deals go sour.

Now, no one should think the statement opens the gates to just anyone who walks  in and wants a loan. Those days are over. But the statement does show a glimmer of light for business borrowers who have sound credit.

Bank lending may be way down, but if you’re a company looking to secure credit (or extend it to your buyers), there’s another way.

A lot of small business owners are running into the same problem — banks just aren’t handing out loans like they used to. The reality is major banks have reduced lending to small and mid-size companies nearly 5% in the past six months alone. This is, of course, symptomatic of a much larger trend that started more than two years ago when the credit crisis hit full force.

Tighter regulation on lending — combined with an increase in defaults — has forced banks to rethink their lending practices. Some banks also cite a lack
of demand combined with a major dip in sales.

Regardless of who or what is to blame, the result is thousands of companies spinning their wheels because they lack the temporary capital they need to grow.

The good news: There are a growing number of third-party companies willing to extend credit to small and mid-size companies without holding them to the stringent requirements big-name banks do.

Small lending companies like Hartsko Financial Services and King Trade Capital specialize in third-party financing (via purchase orders). They enter into a contract with a buyer and a company who have committed to doing business together. The borrower then pays its debt in full to the third-party lender, which collects its interest and passes the principle (in most cases the cost of the goods) back to the company.

While these loans are relatively easy to secure, the trade off is an incredibly short term limit, after which the interest rate skyrockets.  For example, a
typical interest schedule for a Hartsko loan might look like this:

• 3.5% for the first 30 days, and
• 1.25% additional for every 10 days after that, resulting in the possibility of an interest rate that’s 40% (or higher) after the first year.

Despite the threat of revolving debt, business at companies like Hartsko and and King has grown considerably during the past year. King’s profits are up 10%, while Hartsko’s business has increased 80% (with an estimated default rate as low as 5%).

Small third-party lenders now represent the go-to option for startups with
immediate growth potential but very little backing. The idea is to secure the loan, recoup your investment, and get out quick before the interest threatens to swallow you whole.

It’s a dicey proposition, but it’s also one more and more companies (and prospects) are willing to take.

The best bet for companies looking to extend credit via one of these third-party companies — do your own credit checks and have your own credit restrictions to ensure you’re not putting your company at risk. After all, in cases like these, no one gets paid until the lender does.

Source: “The Places They Go When Banks Say No,” by Andrew Martin, New York Times, 1/31/10

The president met with a dozen banking representatives and told them that “the pendulum might have swung too far” in the direction of tightened lending since the financial meltdown. He said they have to loosen up to get the economy going again.

The bankers reportedly nodded but told the president that factors outside their control are preventing banks from lending. For instance:

• Reacting to the meltdown and accompanying fuzzy lending practices, federal regulators and auditors have tightened the screws on banks, making lenders skittish about loosening up, for fear of being penalized. And regulatory agencies have a fair degree of independence, so it’s not as if the White House can just order them to lighten up.
• Problems with collateral abound because of the drop in the real estate market. Many small businesses use real estate — sometimes an owner’s personal residence — to secure loans. With less security comes less lending.

So, while the president couldn’t guarantee that auditors would relax their standards or that there was a solution to the collateral problem, he promised to review the regs to make sure lending wasn’t being held up by pointless red tape.