CDO’s are collateralized debt obligations from a risky, large pool of people that ultimately make the entire cost of lending cheaper for the economy as a whole. In this case, the debt obligations came from sub-prime mortgages. The banks separated the pool of debt repayments into multiple streams of investments, which created products that a much larger group of investors would be interested in purchasing. For the banks it was an exciting and profitable new way to take risky assets and reinvent them into a whole new investment product that everyone wanted.

Billionaire investors such as Warren Buffett and the IMF’s former chief economist Raghuram Rajan warned that CDO’s spread risk and uncertainty about the value of the underlying assets more widely, rather than reduce risk through diversification. The actual risk remained high, although the sale pitch to investors was the risk was properly mitigated and safe.

As time went on investors started to question why these sub-prime mortgages where being approved with lower and lower credit standards. No matter how much the banks wined and dined the investors it was too late. They were no longer interested in CDO’s and taking on the risk. The banks where left holding huge amounts of these toxic assets with no one to invest in them.

With so many new regulations and laws being formulated it has become nearly impossible to mitigate risk when it comes to business and consumer loans. Banks simply can’t nail down a proper risk assessment with how much Washington has been meddling in the credit markets. Bank examiners have been obsessively cautious on how they value bank assets. This has put a demand on increased bank revenues and, as a result, a decrease in lending practices.

It’s great that Washington has been attempting to tackle the economy, but they need to start creating stability and confidence in their economic policies and methodologies for the banking industry to start lending again.

The problem is even with this, start-ups haven’t built up adequate credit history and banks are just not willing to give money to companies with no credit history. Without adequate money coming in, it is difficult for a small business to maintain payroll and pay its bills.

No wonder we keep reading the statistic that 85 percent of business start-ups fail in the first five years. Some research has indicated the reasons for these failures are a lack of funding and poor planning. These facts combined with today’s economy makes small business financing more important than ever.

Well, there are ways for small businesses to avoid funding issues and find alternatives for obtaining business financing. One method is receivables financing, also known as receivables factoring and invoice factoring.

* Fifty-five (55) percent of small employers attempted to borrow in 2009; 45 percent did not, although five percent of owners, so-called discouraged borrowers, did not try because they did not think they could obtain credit.

* Forty (40) percent of small business owners attempting to borrow in 2009 had all of their credit needs met; 10 percent had most of their needs met; 21 percent had some of their needs met; and, 23 percent had none of their credit needs met. The current level of borrowing success is significantly lower than in the mid-2000s when up to 90 percent had their most recent credit request approved.

* The financial institution extending a line of credit changed the terms/conditions of the line(s) during 2009 for 29 percent of small employers having at least one. About 10 percent with a business loan had the same experience as did 22 percent with a business credit card. The most frequent change was increased interest rates.

* The best predictors of success in meeting credit needs were higher credit scores, customers of banks with less than $100 billion in assets, more properties collateralized for business purposes, and fewer second mortgages held.

* Overwhelmingly, the most common planned purpose of credit rejected was to fill cash flow needs.

* Broad and deep real estate ownership is a major reason why small businesses have not yet begun to recover, why larger businesses have been able to recover more quickly than small businesses, and why this recession is different, at least for small business owners, from recent ones.

Dennis puts the findings in a clear context. “The findings show that while obtaining credit has become more difficult, declining sales and/or depressed real estate values typically lie at the base of credit problems,” said Dennis. “That means current small business problems will not be solved by simply focusing on lending issues. Policymakers need to tackle weak demand and real estate.”

Tackling weak demand requires growth in the economy, not more liquidity in financial markets. Weak demand will also not be cured by Keynesian government spending initiatives.

This is an important study that I plan to go through carefully. I am sure it will inform future posts on small business credit.

[By Jeff Cornwall / February 25, 2010]

The problems are greatest in construction loans for single-family homes, where nearly 40 percent of the loans either are delinquent or have been written off as uncollectible. But they are also high in mortgage loans for single-family homes, where $1 in every $8 of loans is troubled.

The figures were released this week by the Federal Deposit Insurance Corporation, as it announced that the number of banks in trouble had risen sharply, and forecast that the rate of bank failures would increase.

The report served as a stark reminder that the banking system remained in perilous health, despite large bailouts of major financial institutions. Many smaller banks are especially exposed to commercial real estate loans, where problems are beginning to grow.

The F.D.I.C. also reported that the amount of outstanding loans and leases at all American banks was falling, even after adjusting the numbers for loans that were written off rather than repaid. The total volume of loans and leases outstanding at the end of 2009 was $7.3 trillion. That figure peaked in mid-2008 at just under $8 trillion.

There are many reasons for the figure’s decline, and it is hard to know how much was caused by bankers’ seeking to husband resources to deal with future losses, and how much by a simple refusal to lend to any but the safest borrowers.

Some of the decline may have been caused by a reduction of borrowing by businesses and even homeowners who drew down lines of credit when the credit crisis was at its worst and have now repaid them, confident that they will be able to borrow again if they really need the funds. And some may reflect continued hesitance by American consumers and businesses to increase their borrowing at a time when the economy remains weak.

As can be seen in the chart at this link, banks charged off 2.9 percent of the outstanding loans in late 2009. The F.D.I.C. said that was the highest rate since the agency was formed in 1934. In addition, 5.4 percent of all loans were at least 90 days behind, and an additional 1.9 percent were more than 30 days overdue.

If there is any reassuring news in the figures, it may be that fewer loans are now going bad. The proportion of loans that are 30 to 89 days behind in payments has fallen since peaking earlier in 2009, while the percentage of loans more than 90 days behind has continued to rise.

Commercial real estate loans are widely viewed to be an area of coming problems, in large part because such loans are normally made for periods of seven to 10 years, in anticipation that they will be rolled over into new loans at the end of the period. Many properties are no longer worth anything close to the amount owed, making such rollovers doubtful. On the other hand, many such loans require payments of interest only, or of only minimal amounts of principal, so it is possible for borrowers to stay current until the loans mature.

At the end of 2009, 6.3 percent of such loans were either behind in payments or were being classified by banks as doubtful for repayment. That figure may be held down by a regulatory change. A bank owed, say, $4 million on a property now worth $3 million would previously have had to classify the entire loan as troubled. Now it can do that to the $1 million difference only.

Just how rapidly that becomes worse may depend on how many banks choose to “pretend and extend,” renewing the loan and hoping property values will recover.

[Published by http://dealbook.blogs.nytimes.com/ on February 26, 2010, 5:11 pm]

While the economic recovery is still tentative — and credit remains tight — small-business owners could help themselves in 2010 by monitoring the macroeconomic picture. Already, members of the Board of Governors and the presidents of the Federal Reserve Banks, have projected that the U.S. economy will expand between 2.5% and 3.5% this year. Meanwhile, the unemployment rate is expected to fall to between 9.3% and 9.7% from November’s rate of 10%, and economists from Morgan Stanley expect that a more sustainable recovery will sink in, as the financial markets improve, risky assets continue to fetch higher prices, and bank lending improves.

In the absence of your own economist or strategic planning office, what indicators should you keep an eye on? Here are five that often matter most to small firms.

Real Personal Consumption Expenditures
Also known as consumption, this indicator, which tracks the inflation-adjusted price changes in consumer goods and services, accounts for 70% of the country’s gross domestic product — that is, the basic measure of a country’s overall output. Basically, this indicator will shed light on whether consumers are spending and how much. “When the public is hording money, small businesses are going to feel that more than anyone,” says Moutray.

Big companies can often lean on hefty credit lines to get them through rough patches, while many smaller firms don’t have the same luxury.

Consumer Confidence
Similar to consumption, consumer confidence and consumer sentiment figures attempt to gauge consumer attitudes toward the economy. The more confident consumers are about the economy and their own financial pictures, the more likely they are to spend. “What we’re telling our clients is, closely follow the economic indicators, which can point to a recovery in demand trends,” says Bonnie Riggs, an analyst for the market research firm NPD Group. “When consumer confidence moves in a positive direction, they’ll see [business] traffic pick up.”

Check the Index of Consumer Sentiment, which is tabulated by the University of Michigan’s Institute for Social Research. Also, look to the Consumer Confidence Index, which is released by the Conference Board, a research firm in New York.

Producer Price Index
Businesses that make products will want to pay close attention to the Producer Price Index, which measures prices at the producer level, before they get passed on to consumers. This indicator speaks directly to how much businesses pay for their materials. When this indicator rises, most businesses will want to raise prices to keep up with higher costs. However, boosting one’s prices during a downturn may be counterproductive, as consumers are looking for savings. In this scenario, a business’s profit margins tend to get squeezed, says Moutray. By tracking the price changes within the production pipeline, however, businesses can anticipate possible inflationary pressures and make changes accordingly, he says.

U.S. Dollar
Another inflation gauge is the value of the U.S. dollar. When the greenback falls against other currencies, U.S. exports look more attractive to some foreign buyers. However, within the U.S. it may take more dollars to purchase the same materials — effectively, causing producer prices to rise.

To track whether or not this is happening, look to commodities prices. The price of gold, for example, often increases when the value of the dollar slides, says Moutray. A good resource for checking the price of gold futures is the Comex division of the New York Mercantile Exchange. Also, check how the dollar performs against a basket of trade-weighted major currencies, the U.S. Dollar Index Futures.

Unemployment Rate
Though it’s a lagging indicator, the unemployment rate, currently at 10%, can be useful for business-planning purposes, says Riggs. For example, because unemployed workers tend to skip eating breakfast out, morning sales have dampened at many restaurants. However, if the jobs picture suddenly improves, that could lead to an uptick in demand for breakfast and cause business owners to ramp up production and potentially hire more staff.

To get an even clearer sense of the labor market, however, Josh Lerner, an investment banking professor at Harvard Business School’s Arthur Rock Center for Entrepreneurship, suggests looking at the local unemployment rate. “We’re in a period where there is tremendous heterogeneity across regions of the country, and, as such, using a one-size-fits-all measure isn’t as helpful as local figures.”

Article written by DIANA RANSOM
Write to Diana Ransom at dransom@smartmoney.com

At a town-hall meeting in New Hampshire, President Obama outlined his plan to increase hiring in small businesses by granting local banks $30 billion in loans.

Naming job creation as his priority for 2010, President Barack Obama pitched his $30 billion loan program proposal Tuesday to help small businesses grow their companies through increased hiring.

In Nashua, New Hampshire, Obama said he hopes to take money repaid by Wall Street banks as part of the $700 billion bank bailout known as TARP to create the Small Business Lending Fund, which would provide capitol to community banks to spur economic growth on Main Street.

“These are the small, local banks that work most closely with our small businesses – that provide them their first loan, and watch them grow through good times and bad,” he told a crowd of more than 1,500 at a Nashua North high school.

Citing a now-familiar statistic, Obama noted that small businesses have created roughly 65 percent of all new jobs over the past 15 years. The new loan program could, by loosening credit, help to create thousands of jobs, the president said. And jobs will be Washington’s number one focus in 2010, Obama promised.
To encourage hiring, the president supports a tax credit that will encourage companies to hire workers, to pay competitive wages, and to expand facilities such as manufacturing plants. The administration also supports cutting the capital gains tax on small business investment.
Speaking in small-town New Hampshire, which has felt the economic pain of the deepest recession since the Great Depression, Obama stressed that the worst times are behind country. “Many good, hard-working people who met their responsibilities are now struggling because folks on Wall Street and in Washington didn’t meet theirs,” he said.

Obama bookended the speech by mentioning ARC Energy, a Nashua-based LED light manufacturer; the president toured the company’s facilities earlier in the day, scoping out a machine that grows sapphire crystals. “The technology they’ve created is the only of its kind in the world,” Obama said. “They’re this little business in a condo out on Amherst Street, and they have the potential to revolutionize an industry.”
The president’s small business speech comes one day after announcing a $3.8 trillion fiscal blueprint for 2011. The budget calls for an additional $100 billion in spending to bring down unemployment and boost the economy. At the same time, Obama said he plans to reduce the federal deficit, to eliminate 120 government programs, and to cap spending over the next three years.

Already, the program has drawn criticism from restive members of Congress — a fact the president conceded in his speech. “Because there’s no magic wand that will make economic problems that were years in the making disappear overnight, it’s easy for politicians to exploit the anger and anguish folks are feeling right now,” Obama said.

1. Don’t let your accounts receivable get out of control. First of all, it is vital to have an organized accounts receivable department. You need to know who owes you what, and you need to know who is making payments. You also need to make provisions for following up on invoices that owe you money. An efficient workflow needs to be maintained so that you are receiving payments in a timely manner for your goods and services.

2. Maintain a good relationship with your financing partner. This is another essential point. Your financing partner – whether it is a bank, an investor or a factor – helps you get the cash you need to keep your business going. You need a solid, professional relationship with your financing partner to ensure that you can get the money you need, when you need it. Cash flow is vital, and you need to make sure you have incoming capital.

3. Don’t cut your advertising budget short. Many businesses make the mistake of cutting the advertising budget first thing. This is a mistake. The old adage “you need to spend money to make money” is most true of advertising. In order to sell products, and to reach your target market, you need to pay for advertising outreach. Of course, just throwing money into any advertising is inefficient. Instead, you need to have a coordinated plan. You need to figure out how you can best reach your target audience, and use your money efficiently so you get the most bang for your buck. Before you start advertising, do a little research and take the time to develop a coordinated plan of action.

4. Stay current with the latest technologies in your industry. Technological advances are always being made. Your industry is always growing, changing and seeing new things. If there are technologies that make things more efficient, or that provide the latest in industry needs, you need to make sure you are keeping up. This will help you lower costs in the long run, and it will show investors and customers alike that you are up-to-date and that you are aware of what is going on in the industry.

5. Treat your employees with respect and professionalism. Your employees represent you. Employees that are treated with respect and professionalism are more likely to be happy and work better. They will also say good things about your company and how it is managed. This is important. There are few things that can damage a business reputation like an employee that has a legitimate complaint about he or she has been treated by the management. Having employees that work hard and do so efficiently can help you manage costs better, and will keep your company in good shape. They are also more willing to go the extra mile when it is needed if you treat them well.

6. Network in your community with other business owners. Networking is important. It is a good way to forge relationships. Also, networking can provide you with the ability to find good partners for your business ventures. You can also find new clients through networking, as well as find suppliers that can help you come to a more equitable arrangement. Being involved and visible in the community also has other advantages. People are more likely to do business with people they know, so getting to know people can bring you more business.

7. Make every business deal a win-win for all involved. If you want a reputation as good business person, you need to deal fairly with others. If you take advantage of other businesses in your dealings, eventually no one will want to associate or do business with you. This can cause you to lose business. Additionally, customers and clients may hear that you are not a pleasant person to do business with, and take their patronage elsewhere. You want to cultivate good feelings. You do not have to let others get the better of you, but you should not strive to get the better of others. Look for solutions that provide an equitable arrangement for all involved.

If you take care to follow sound practices and work at building your business in a practical, organized and fair manner, you will find business success.

If we consider the areas of economic activity which have been largely responsible for this improvement, the result becomes even less impressive. We are told that the catering and leisure industry has had a significant impact on the figure. But surely December is the busiest time of the year for pubs, hotels, restaurants and allied establishments due to the Christmas and New Year festivities. And, of course, January and February are the quietest time of the year for those trades. So let’s all try to guess what affect this will have on improving the current quarter’s statistics. Let me think now, oh yes – none.

The increase in Government and Public Spending also assisted the figure to climb into the black, but how long can this go on? After all, it is money which has been provided by the taxpaying public which is being spent. Robbing Peter to pay Paul. A General Election must take place by May at the latest, and whichever party obtains a majority it will have to impose swingeing tax increases and cuts in public spending. On the 1st January VAT returned to its usual level of 17.5% and there is widespread opinion in Westminster that it will soon be increased to 20%.

We may be technically out of recession, but the hard reality is that we have been sliding downwards for the last eighteen months and we are now at the bottom of the trough. It’s going to be a long and difficult climb back to the happy pleasures which we took for granted and enjoyed pre-recession.

Source: Market Wire, February, 2010

“This is a good start. But it’s a small start,” said G. Michael Moebs, chief executive of Moebs Services Inc., a Lake Bluff, Ill., research firm specializing in U.S. banks.

The $30 billion in Troubled Asset Relief Program funds targeted by Mr. Obama represent about 4.3% of the $700 billion in small-business loans held by U.S. banks and savings institutions, according to the Treasury Department. As of November, the 22 largest banks that got capital infusions through TARP had $257 billion in small-business loans, the Treasury said.

Gene Sperling, a counselor to Treasury Secretary Timothy Geithner, said, “The president’s plan will mean $30 billion in capital for smaller banks, which has the potential to leverage a far higher amount of actual new small-business lending.”

Many details of the plan remain unclear. In one scenario being considered, the U.S. government would let banks get an amount equal to 3% to 5% of their assets. Required dividend payments by the banks would be reduced if they substantially increase their business lending.

Mr. Obama is likely to face resistance in Congress, especially from Republicans. “It’s just another use, maybe a good use, but just another use of TARP funds that wasn’t originally intended,” Sen. Richard Shelby (R., Ala.) said Thursday. The Senate Banking Committee’s top Republican said federal officials should push for the return of all TARP funds before discussing any new uses of the money.

Rep. Nydia Velazquez (D., N.Y.), chairwoman of the House Committee on Small Business, said lawmakers “need to be open to new approaches,” since many small businesses “still can’t find affordable loans.” Pending legislation that would allow the Small Business Administration to make more loans directly to small businesses would be a more effective way of helping companies that are struggling to find capital, she said.

The banks referred to by Mr. Obama in his first State of the Union include more than 7,500 financial institutions with assets of less than $10 billion apiece. Lenders in shaky financial condition likely wouldn’t be allowed to participate in the program.

According to a Senate report last year, American businesses with fewer than 20 employees have suffered steeper job losses during the recession than bigger companies. A loan-induced jolt caused by steering TARP funds to small businesses could help Mr. Obama as he struggles to reverse his recent political slide.

Some bankers said loan volume isn’t likely to surge until more consumers open their wallets. “The truth is small business is largely consumer-driven right now, and consumers aren’t spending,” an executive at one regional U.S. bank said Thursday. “The biggest thing is to get jobs growing, which will increase consumer spending.”

Even if banks flock to the $30 billion, they could wind up deepening their exposure to loan losses. For example, Carol Lundgren said a loan would help Infinity Stone Corp., the Portland, Ore., granite-countertop manufacturing and installation company she owns with her husband, ride out the economic slump. But the company already has missed two lease payments owed to PNC Financial Services Group Inc. The couple laid off 26 of their 48 employees, and revenue shrank to $1.6 million last year from $3.2 million in 2007. Business is starting to rebound, but “it might be too late” for a loan to make much of a difference, she said. “There’s a point in time where we get too discouraged.” PNC declined to comment.

Separately, Mr. Obama will travel to Baltimore on Friday to flesh out details of a proposed $33 billion tax cut to spur small businesses to hire new workers or boost wages. Employers would get a $5,000 tax credit for every net new worker hired this year and reimbursement for Social Security taxes paid when they increase wages.

Though all businesses would be eligible, the Obama administration would focus on small companies by limiting the maximum credit to $500,000 per employer. The tax breaks wouldn’t be available to firms that reduce employment or payrolls this year, or those that replace full-time employees with part-time workers. A business wouldn’t be allowed to claim the credit by simply changing its name.

By MARSHALL ECKBLAD