The legislation, H.R. 5297, is designed to provide an incentive for community banks to increase small-business lending. Banks that meet the qualifications would get access to a $30 billion fund for loans to small businesses. Participating banks would submit a plan for how they’d use the money to extend credit to businesses in the community.

A couple of hitches:

• The bill faces a rough ride in the Senate. Some senators, already in trouble with constituents over votes in favor of the TARP bill, are worried that a “yes” vote for SBLF will brand them as supporters of “another bank bailout.”
• The bill doesn’t require banks to lend to small businesses in order to access the funds; it only creates incentives for such lending and requires banks to submit plans.

Proponents of the bill say passage will result in $300 billion in new credit and lending to entrepreneurs. The Congressional Budget Office estimates that repayment of loans under the bill would bring in a profit of $1.1 billion to taxpayers.

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

Let’s start with a question. Do you know the function of the Export-Import Bank of the United States? If not, maybe you should.

The E-IB is the official American export credit agency. It guarantees and grants loans, provides insurance, on secures payments due from foreign customers. The bank has seven regional offices to help small businesses export their goods and services. And we may be talking about small business, but we’re not talking about small potatoes: Last year, the bank was involved in facilitating $4.36 billion in 2,540 transactions for small business that exported goods and services.

And now, Congress and the president want the bank to do more. Last month, the Senate Committee on Small Business and Entrepreneurship approved legislation to authorize the E-IB and other agencies, such as the Small Business Administration, to focus more efforts on helping smaller companies tap into the export market.

Here’s a New York Times profile of two typical companies that already have been helped:

• Engineered Systems and Equipment, a manufacturer of animal feed processing equipment in Kansas, had 20 employees 18 months ago, when the E-IB helped the company broker a $500,000 deal to sell products to a Honduran company. Now, as a result of the deal, Engineering Systems and Equipment has doubled its workforce.
• Weldy-Lamont Associates, a 13-employee engineering firm in Illinois, worked with the E-IB to get a five-year contract in Ghana to put up utility poles and string lines. And the company is working on similar deals with other small nations.

To learn more, go to the Export-Import Bank site and click on the link “Small Business Portal.”

Your company could be one that may soon qualify for some additional financing, courtesy of the federal government.

For the first time in 25 years, the Small Business Administration has decided to revisit its definition of a “small business” in 900 industries.

In most cases, definitions will be broadened so more companies will mean more businesses will be able to participate in programs like the popular 7(a) loan guarantee program.

So how will the feds decide who gets new consideration?

The main criteria:

1. the average size and start-up costs for a business in that industry
2. what competition is like, and
3. the barriers to entry.

We’ll update you as soon as the standards are revised.

We’re about to see that phenomenon unfold when union president Richard Trumpka visits the White House in December with his recommendations for reviving the economy and creating jobs.

At the top of Trumpka’s agenda: urging President Obama to dip into the $210 billion remaining in the Troubled Asset Relief Program and use the money for low-interest loans to small and medium-size business. Trumpka will offer his ideas at a conference consisting of business leaders, labor bosses and economists. He unveiled his TARP plan at a November speech at the Economic Policy Institute in Washington.

So why has Big Labor become the friend of the business community? Probably for at least two linked reasons:

• Smaller businesses employ about 80% of the workforce, so their revival is crucial to pushing unemployment to some level below 10%.
• The 2010 elections are looming, and Trumpka, like any other politically savvy leader, knows if unemployment stays high next year, the Democrats likely will take a beating at the polls. And fewer Democrats equal less support for labor.

Whatever the reason, there’s a chance President Obama will listen and consider loosening credit for smaller companies.

In prior recessions, small businesses usually led the way out of the gloom. The conventional wisdom was that when bigger companies shrunk and laid off, the little guys benefited by getting a bigger labor pool. Plus, some of those laid off were the very ones who started their own small businesses.

Times have changed, it seems.

On top of tight credit and a slow economy, small businesses have been hit with the triple-whammy of tough bankruptcy laws that show little or new mercy for small companies that are trying to tough it out until times get better.

When the laws were passed in 2005, the point was to make it more difficult to file for personal bankruptcy. However, one of the effects was to subject small-shop proprietors to stricter requirement than those for bigger companies.

What’s worse: When bigger companies go under, it’s their small contractors who don’t get paid. So the little guy is getting it from both sides.

The result: Small businesses are going under at record rates, and few are coming back.

Some of the grim numbers:

• The average daily number of bankruptcy filings is about 350 — a 240% increase over the figure in 2006, when the new bankruptcy laws went into effect.
• Court records show that the number of bankruptcy filings in the first five months of this year hit 36,106, easily topping the 23,829 in the first five months of last year.
• The National Federation of Independent Business says its survey of small-business owners shows that 16% says it’s too difficult to get loans — the highest reading since 1982. Fewer loans translate into more bankruptcies.