Most U.S. banks kept credit tight in the first three months of the year, and some tightened lending terms further, according to the Federal Reserve’s latest senior loan officer survey.

Some categories showed improvement after years of lending cutbacks. Banks reported easing terms on commercial and industrial loans to large and medium-size firms. While the easing took place only at large banks, it marked the first time since 2006 that banks reported easing standards in two straight quarters.

Some consumer loans, such as home-equity lines of credit, also showed easing in standards. But key areas, such as residential mortgages and commercial real estate, saw continued tightening in terms.

The Fed found that a third of banks tightened terms and conditions on new credit-card accounts for small businesses, while more than a quarter of banks did so for existing accounts. More than 40% of banks said they raised minimum required credit scores. Almost a third said they widened spreads—interest rates over the bank’s cost of funds—on outstanding balances, and 15% reported charging higher annual fees. More than two-thirds of loan officers said their current level of standards and terms is tighter than their longer-run average.

Many small business customers, meanwhile, are cutting back on borrowing in part because of the weak economy. Noelle Tarabulski, who used credit cards to finance her Lakewood, Colo., consulting firm before the recession, relied on credit lines of up to $150,000 before her interest rates shot up to as much as 38% after the financial crisis. That came just as her revenue plummeted from $1 million in 2007 to about $200,000 last year.

“I’m just never putting myself in a position where a bank can do that to me again,” said Ms. Tarabulski, whose firm, Builder Consulting Group Inc., works on best practices for homebuilders. She expects about $600,000 in revenue this year but is cutting her debt as much as possible. “At this point my approach to credit is 100% different,” she said. “I have no interest in being leveraged at the level that I was. For me I think there’s a healing period going on.”

Businesses and households across the U.S. are trying to cut their debt and increase savings, spurring a continued drop in loan demand. The Fed said demand for prime residential mortgages fell at a third of banks surveyed, while it was stronger at a fifth of banks.

Chief Executive Brian Moynihan said during the company’s first-quarter conference call last month that loan demand remains weak because of overall economic conditions, as opposed to an unwillingness to lend. “Customers are not feeling the need to draw on our lines because they don’t see economic demand,” he said.

Outside of credit cards, some U.S. banks in the Fed survey reported easing standards and reducing spreads for consumer loans. About one in seven banks said they were “somewhat more willing” to make consumer installment loans compared with three months ago, while the rest were unchanged.

“The gradual normalization of bank credit supply and demand bodes well for loan growth in coming quarters, and the increasing availability of bank credit is slowly removing one of the remaining drags on the pace of recovery,” said Michael Feroli, chief U.S. economist at J.P. Morgan Chase.

By SUDEEP REDDY

It does look like it has. Some economists are actually optimistic that the prospects for growth this year is great. Industries are currently reporting increasingly better profits and added more jobs, although the recovery may still remain slow. A senior economists of the Federal Reserve Bank of Chicago, William Strauss, said, “After more than two years of job losses, job creation increased in the first quarter of 2010, suggesting a better outlook for hiring over the next six months.”

Last March 2010, the Labor Department announced that job creation increased by 162,000 which was the largest increase in 3 years. The report still was made to look like there was a reason to celebrate although it would mean that we had to ignore that nearly one third of the jobs created then came from temporary hiring for the Census.

While economists of the Federal Reserve keep forecasting economic growth or that the recession is over, others are forecasting even a worse recession coming. It is interesting to see how the Federal Reserve never even warned the American people about this recession before it actually happened, and now they actually forecast that the recession is over or that the economy is at the verge of recovery. Meanwhile, other economists, forecasters, successful investors, and businessmen seem to have a completely different opinion from the Federal Reserve… and even the government.

Jim Rogers, investor and author, believes that the recession is going to be worse, despite the rise in stock market.

Gerald Celente, CEO of the Trends Research, believes that the government is making it appear as if there was a recovery, but the fact of the matter is that nothing is going to get better.

The National Bureau of Economic Research, a body that confirms the inception and the end of US trade cycles, believes it is far to early to announce that the recession is over, despite positive indicators.

Lawrence Mishel, a nationally recognized economists and President of the Economic Policy Institute, believes that the recession is not over.

So is the recession over or not? Whom would you rather believe more? Probably not a good idea to believe the Federal Reserve or the government. However, it is still amazing to see how 70% of Americans actually do believe the lies that it is over… despite of all the counter forecast by independent economic analysts or forecasters. But then again, maybe they weren’t really lies.

The recession is probably over, but not for you… it is over for all the little friends of the Federal Reserve who received a huge chunk of bail-out money…

The official recession is over. That’s because the economy is growing again after a sharp decline, with GDP back to the levels of mid-2008. For people who have kept their jobs, suffered no loss of income and enjoyed a rebound in their investments thanks to the year-long stock market rally, things are pretty good.

Then there’s the unofficial recession, which clearly persists. More than 8 million people have lost their jobs over the past two years, and the economy has barely started to add those back. Many others have had their pay or hours cut. The housing bust, in its fourth year, still isn’t over. Foreclosures continue to mount, businesses and consumers remain gloomy, and many families are struggling to get by on reduced income. “It’s a recovery, but it sure doesn’t feel like it,” says Nariman Behravesh, chief economist for forecasting firm IHS Global Insight. Here are five things that still must happen for a robust recovery to kick in.

Banks need to lend more. The government’s emergency measures helped stabilize the financial system, but banks haven’t taken the next step and increased lending. With trillions in bad loans still on their books, many banks continue to hoard cash and turn down loan applications. That depresses the market for homes, cars, appliances and other costly items that many consumers can’t pay for in cash. It also squeezes small businesses, which often rely on credit to meet payroll, order supplies, invest and grow. Behravesh predicts that lending could bottom out and start to pick up by late this year or early next year–although that would probably be the point at which the Federal Reserve starts to raise interest rates to subdue inflation. A few things that will signal improvements in the credit market: a drop in the required down payment for well-qualified home buyers, which is typically 30 percent or more now; increased availability of car loans for subprime borrowers with a credit score below 680; and banks’ willingness to increase their customers’ credit-card limits, if asked.

Incomes need to rise. Median income was stagnant for about a decade leading up to the recession, and it probably fell 5 percent or more over the past couple of years. Some economists worry that reduced incomes could indefinitely curtail consumer spending, which has long fueled the U.S. economy. A glut of unemployed workers will keep wages low in many industries for years. And since many families have lost wealth because of falling home values or declining investment portfolios, or both, they need to save more to prepare for retirement. That leaves less money to buy stuff. The good news is that inflation is low and energy prices are stable, which helps stretch a dollar.

Housing needs to stabilize. Most of the pain is probably in the past, but home values continue to erode in many regions. Moody’s Economy.com predicts that house prices, which have fallen more than 30 percent from their 2006 peaks, could still fall another 5 to 10 percent through the end of this year. Since many families still have the majority of their wealth invested in their homes, the economy can’t really get healthy again as long as such a huge asset is falling in value. The end of the federal home-buyer tax credit and other government programs throughout the year will test whether the housing market can stand on its own. If it can’t, the government could step back in, but that would only signal further weakness in a sector that accounts for more than 15 percent of the economy. The silver lining is that falling prices make it a great time to buy, for those with enough cash or the ability to get a mortgage.
Confidence needs to rebound. Americans remain gloomy, with most consumer-confidence surveys showing only modest improvements from the low points hit during the recession. The most obvious reasons are the weak job market and a sense that the recovery will be weak at best. Businesses are downbeat too, with CEOs worried that strapped consumers will put their wallets away. That makes them reluctant to hire, which perpetuates the malaise. Confidence is a perplexing psychological phenomenon, and economists aren’t sure what it will take to make consumers upbeat enough to propel a robust recovery. But once home prices stop falling, jobs seem more secure, and people feel like the bloodletting is over, that will certainly help.

Jobs need to return. The availability–or lack–of jobs is the single biggest factor in the economy, and unfortunately, a pickup in hiring is likely to be painfully slow. Many of the 8 million lost jobs are probably gone forever, as manufacturers downsize their operations and many companies substitute technology or cheaper foreign labor for American workers. The unemployment rate, which is 9.7 percent now, might even rise throughout the year, as workers who gave up looking for jobs try again and the labor force swells.
Still, economists recognize some familiar patterns in the job market that suggest things are finally getting better instead of worse. Corporate profits are strong, thanks to aggressive cost-cutting over the past two years. That means companies can afford to hire workers, if they decide to. And productivity gains have hit record levels recently, which means companies are extremely efficient; if demand picks up, they may only be able to meet it through increased staffing. A good indicator of real improvement would be several consecutive months of six-figure job gains, due to permanent hiring and not temporary factors like the census or weather-related events. “The recent resumption of employment growth will be sustained and gather strength over time,” insists T. Rowe Price chief economist Alan Levenson. That’s not the kind of roaring endorsement most Americans want to hear, but it suggests that sooner or later, the recovery in your neighborhood will catch up with the one that economists see in the data.

By Rick Newman

By Conor Dougherty and Pui-Wing Tam

By securing a contract with the government, one can have a big relief. Typically, the government is a reliable payer and establishing a relationship with it can result in other business opportunities. However, a problem can be with how long the government takes to pay its vendors. It can take as long as 90 days to be paid for the products or services provided. Imagine how much cash on hand a business will need to buy materials, meet payroll, pay for rent and many other business operations.

Think of a business that has limited funds: a start up, a business that is working on several projects or a company with a too small credit line from their lender. What are the options to raise the funds quickly when hoping to win a government contract with guaranteed payment that can take your company to the next level? Should you take on the contract and hope to get paid quickly or simply turn it down, waiting for smaller jobs with better payment terms? A choice like that just adds more stress to business owner’s life. Luckily, a fast and pretty simple solution does exist – Invoice Factoring.

Invoice Factoring or Accounts Receivables financing can resolve all cash flow related worries of the government vendors. Factoring companies are primarily concerned with the creditworthiness of the vendors’ customers. Governments are typically very good credit risks and are eligible for factoring. Sounds good, doesn’t it? Moreover, the initial process is quite simple and it only takes a few days to get the funds the first time. Once the relationship with a factor is established time to fund shrinks to 24 – 48 hours.

Factoring works in the following way: a vendor sells open invoices to a factoring company along with providing any other required documentation and receives from 70% to 90 % of the money owed on it immediately. The factoring company will be contacting the government entity regarding the payments on the invoices and once the money is received, the balance of the invoice amount will be paid back to a vendor less the factor’s fee for service.

This is a win-win situation for all the parties. A factoring company provides its regular services and a government vendor gets to take on a profitable contract and establish a relationship with a government entity, that the lack of wouldn’t not allow without the factor.

By Natasha Matsyushevskaya

No matter what the true cause is, it means business owners are hoping for the credit crunch to ease, higher consumer spending and lower unemployment. Nevertheless, how do we expect this to take place if these three issues dominate? A rise of activity in small to medium-sized business sector would help as we know that the decline in business by this sector significantly contributes to the official 9.7% unemployment rate in the country (and unofficial probably double that).

Small business owners would be happy to get their companies going but they are facing a huge obstacle – a complete inability to get financing from banks. Bank financing was the easiest path in the past. Not anymore, today banks are stricter than ever and are giving out loans only to businesses with flawless credit and reputation. Therefore, start-ups and companies with not so perfect credit have zero chance to get traditional financing and are forced to look elsewhere or give up.

However, the situation is not as pessimistic as it looks. There are still many business opportunities in the market for small businesses and start-ups. The main challenge is to find enough funds to stay afloat until they start receiving profits from the venture.

Many business owners are not aware of or simply underestimate funding options of accounts receivables financing or invoice factoring. Companies that provide this source of commercial capital are called factors and non-bankable clients are their market niche. Besides the simplistic nature of the process, it is very fast as well. Instead of waiting for the clients to pay their invoices, that can be very painful for businesses with cash flow problems, companies sell them to a factor at a discount price. It normally varies from 70-90 % of the invoice value. The rest of the money is put in the so-called reserve account and will be given out to the company as soon as the factor collects the payments from the debtors. The average fee for the service is about 2.5 % but it varies with the volume of the invoices. The bigger volume of the invoices is factored, the cheaper it gets.

Another important feature of the factoring that makes it attractive for the businesses is that the factor is only concerned with the creditworthiness of the client’s customer. This can be a huge relief for the start-ups with no established credit or for the company with poor credit.

Small and medium sized business owners can greatly benefit from utilizing accounts receivables financing. Going after bigger contracts, being on time with suppliers and payroll are just few advantages of factoring.

Traditional bank lending will be slow to increase for small and medium sized business any time soon. Even considering the government’s latest attempts to revive it, factoring is the valuable alternative that can secure the steady cash flow to fuel growth of your business today.

By Natasha Matsyushevskaya

* 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]

Purchase order financing is sometimes used by companies when they are having cash flow problems. When they are unable to come up with the money to pay for materials from their own cash stores, working with a company that can aid them in doing so is extremely helpful and sometimes necessary so that they are able to meet any contractual obligations they have with a customer.

PO factoring can be a crucial component in a company’s success. This may be especially true if they are having financial problems. Many businesses in this situation are hesitant about taking on new customers and may have difficulties servicing the ones that they have. This is because often times it requires money to do so. If they don’t have it and are not able to receive a loan, they will find them selves in a perilous position, unable to make money they might desperately need. Fortunately, purchase order financing gives them an out.

The process works like this. After determining that a company has an iron clad contract with a customer, a Factor will pay for the materials that business needs to fulfill their order. The materials are then shipped to the company, where they are used to produce whatever product they are contracted to. After they complete, deliver and are paid for it, they share a portion of the proceeds with the Factor. This allows the business to get what they need in order to service their customer. The Factor benefits because they are paid for their services.

This sort of arrangement can be especially beneficial for large companies. This is because companies of this size often have orders that are very big and thus costly. If they are unable to put up the money necessary to pay for the materials they need to satisfy an order, they lose business and revenue. Rather then use the cash they have on hand, working with an experienced factoring company makes good, financial sense. Monies that would go toward purchasing materials could be spent on other aspects of a business, including marketing, fixed costs and debt.

Large companies, especially manufacturing ones, looking to save money, may want to look into purchase order financing. It allows them to obtain all of the materials they need to provide goods to their customers without using any of their own money. This can be quite beneficial. It ensures that they will be able to service current and future clients, without spending any of their own capital. PO factoring is one of the only ways to accomplish this without taking on new debt.

Invoice financing is not a brand new concept. However, it has been receiving much more attention and interest lately, largely because traditional commercial financing options are waning. For example, it has become increasingly difficult to receive a bank loan.

Invoice financing is much less expensive then other commercial finance options. Bank loans can be costly when considering the amount of interest typically charged. Even more costly, are credit cards, which can quickly cause a company to rack up a mountain of debt that may be incredibly difficult to repay. This is a threat, especially so, to small businesses who may utilize credit cards to make ends meet. Invoice financing is a very good way for a company to receive an advance on their invoices.

A Factor is a company that purchase invoices or receivables at a discounted rate. This allows companies to receive upfront monies for invoices that may not be due until 90 days. As stated before, waiting this amount of time to be paid can be problematic. In some cases, it may make it difficult for a business to meet their financial obligations. It can also stymie the growth of a company because they may not be able to purchase advertising or hire a marketing specialist who might be able to help them grow their business.

The average price that a factor will pay for invoices is about 70 to 90 % of their full value. These monies are given to the company right away and can be accessed is as little as 24 hours and generally no longer then 7 days. A company can use this cash for whatever they want. There are no restrictions.

After the factor has paid for the invoices, they will then collect them and return the money to company that originally sold them. This will not include their fees and any money they already paid for the invoices. Invoice financing is an excellent option for companies that are unable to wait the standard 30 to 90 days to receive payment for work they have already completed for their clients. As long as their customers have good credit histories, it is possible to receive an advance on those outstanding invoices regardless of their own personal credit history or the amount of time they have been in business. This makes it a good option for those with average-to-poor credit or who have just opened their doors.