* 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]

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.

By Jim Christie

SAN FRANCISCO (Reuters) – California’s government risks a financial “meltdown” within 50 days in light of its weakening May revenues unless Governor Arnold Schwarzenegger and lawmakers quickly plug a $24.3 billion budget gap, the state’s controller said on Wednesday.

Underscoring the severity of California’s cash crisis, Controller John Chiang, who has previously warned the state’s government risks running out of cash without a budget deal, said revenues in May fell by $1.14 billon, or 17.7 percent, from a year earlier.

Additionally, the revenues of the government of the most populous U.S. state fell short of estimates in Schwarzenegger’s budget plan by $827 million, Chiang said.

He warned California’s state government is speeding toward a financial disaster unless officials act urgently to balance its books.

“Without immediate solutions from the governor and legislature, we are less than 50 days away from a meltdown of state government,” Chiang said in a statement.

California’s revenues have been on a dramatic slide as a result of recession, rising unemployment and its lengthy housing downturn.

The state’s revenues from personal income taxes tumbled by 39.3 percent in May from a year earlier while revenues from corporate taxes fell by 52.1 percent and revenues from sales taxes sagged by 7.6 percent, according to a report released by Chiang’s office.

“A truly balanced budget is the only responsible way out of the worst cash crisis since the Great Depression,” Chiang, a Democrat, said.

DUELING BUDGET CONCEPTS

Schwarzenegger, a Republican, has proposed filling the state’s budget gap with deep spending cuts, borrowing from local governments and by scrapping some state programs, including its welfare program.

Democrats who control the legislature are crafting a rival budget plan that includes spending cuts and saves programs Schwarzenegger has proposed eliminating. They instead would use reserves estimated in his budget to narrow the budget gap.

State Senate President Pro Tem Darrell Steinberg said on Tuesday he wants a budget agreement by the end of this month.

California’s new fiscal year begins on July 1. The sooner the state has a budget the better poised it will be to raise short-term cash to fund its operations by selling revenue anticipation notes, or RANs, on the municipal debt market.

If pressed, California could sell revenue anticipation warrants, or RAWs, an idea floated by Schwarzenegger when he unveiled his budget plan last month. But he quickly shelved it amid opposition from lawmakers.

“No one wants to issue RAWs for our cash-flow borrowing,” said Tom Dresslar, a spokesman for State Treasurer Bill Lockyer. “Everyone would prefer to issue RANs for the obvious reason: It costs less.”

Lockyer, a Democrat, supports a budget with the reserve Schwarzenegger has proposed. That would increase confidence among investors that California has cash to pay the $7 billion to $9 billion in short-term debt notes that Lockyer’s office assumes the state will need to sell, Dresslar said.

Article written by Jim Christie.