Helping homeowners make their mortgage is all the rage: Banks are easing loan terms for hundreds of thousands of them, and lawmakers are either applauding or demanding more.
But another sector, small business, has mostly been left on the sidelines, and that doesn't sit well with the business owners who have watched rescue programs rolled out, in both the private and public sectors, for homeowners, car buyers and the banks themselves.
But gradually, more attention is being paid to the struggles of small-business owners. Former presidential candidate John McCain complained this month that small business “has been ignored in this whole bailout.” Congressional committees have pledged to make it easier for them to access capital. The federal stimulus bill included a few breaks for small business, such as increased opportunities for tax write-offs, that are still being developed. And the Treasury has asked the largest banks that have government loans to report each month on how much they're lending to small businesses.
In the private sector, Bank of America Corp. chief executive Ken Lewis is one of the first major voices to speak out on adjusting loans for small businesses. In the first six months of this year, the Charlotte bank modified credit card loans for 32,800 small-business clients to improve the businesses' monthly cash flow, Lewis said, compared with 40,000 all of last year.
“We know small businesses are having a very tough time, and we're doing all we can to help,” Lewis told the National Urban League in a speech last month.
The bank has worked case by case with businesses, which can have credit-card loans or traditional bank loans, said spokeswoman Betty Riess. Though the concept isn't new, the bank is doing more of the adjustments “given the current economy,” she said.
Unlike for mortgage loans, there are no major federal programs requiring banks to modify small-business loans. The country's other three mega-banks – JPMorgan Chase & Co., Wells Fargo & Co. and Citigroup Inc. – declined to comment on what they might be doing for small-business owners. And even among small businesses, the idea of widespread loan modifications is only beginning to get some buzz.
Bob Durant's all for it. He and his wife, Kathie, took out three loans from an N.C.-based community bank when they opened their Concord Dive Center in 2006, using their house as an asset. He hasn't approached his bank about modifying the loans, since “I'm not going to mess with what's not broken.” But still, he wouldn't mind getting a lower interest rate or consolidating the loans.
Durant said it's only fair: “Government is bailing out the banks; the banks should bail out the people they've been doing business with all along.”
At his dive shop in downtown Concord, business has been slow for most of the year as consumers cut back on luxuries. To compensate, Durant started running more sales, promoting less-expensive equipment and parking his logoed van in different spots around town – “Anything to get our name out there as cheaply as possible.”
BofA's troubled portfolio
At Bank of America, the push to help small-business owners is partly self-interest, because it's usually more profitable for a bank to modify a loan than to write it off completely. Though Bank of America's small-business portfolio isn't large, it is troubled: It accounts for only 2percent of total loans and leases but 9 percent of total charge-offs, which are loans the bank doesn't expect to collect on.
In the second quarter, Bank of America charged off 16.7percent of its small-business loans, higher than any other category: Charge-offs were 13.9 percent in domestic credit cards, 4.7 percent in home-equity loans, 3.3 percent in commercial real estate loans and 1.7 percent in residential mortgages.
It's difficult to compare the performance of Bank of America's portfolio to that of the other large banks, which don't go into detail about their small-business loans in quarterly earnings reports. But probably all banks are willing to work with customers in a recession, said Dick Bove, an analyst at Rochdale Securities.
“In bad times, I would be very surprised if you could find a bank that said they're not working with their small-business customers,” he said.
Steve Brown, CEO of Pacific Coast Bankers' Bank, which works with more than 2,000 community banks, said he's seeing small banks across the country restructure the loans of small businesses, which are often a big portion of a smaller bank's clientele.
“When a customer gets into trouble on their loan, a community bank will typically bend over backwards to try and assist because they know the small business is important to the community at large as well,” Brown said.
Small businesses borrow to get started, to expand, to have a safety net, or just to manage day-to-day operations, especially if their cash flow varies seasonally. Many rely on credit cards instead of traditional bank loans, especially if they have little in the way of assets to pledge as collateral.
Todd McCracken, president of the National Small Business Association, said in congressional testimony this spring that it is “notoriously difficult to determine” the creditworthiness of small businesses, since their cash needs and income can vary from season to season and year to year.
But, former bank analyst Gary Townsend contends, Bank of America didn't do itself any favors with relatively lax underwriting for small-business loans. “There are ways to conduct yourself in small-business lending without it entailing 17 percent losses,” Townsend said.
The bank grew small-business lending rapidly in 2005 and '06 after deciding it was underrepresented in the sector. But it started putting on the brakes last year as defaults increased: It tightened underwriting, approved fewer loans and reduced the size of the ones it did approve. Asked by an analyst last fall about the credit quality of the small-business portfolio, Lewis replied: “I'm very happy that this is relatively small, but it's a damn disaster.”
Role of community banks
Mike Moebs, CEO of the economics research firm Moebs Services, thinks the high rate of charge-offs is proof that small-business loans are best left to community banks: “They're trying to deal with the small business market in an off-the-shelf, here's-something-that-fits-into-these-round-holes-and-square-holes kind of product. And a lot of small businesses can't do that.”
According to second-quarter data from the Federal Deposit Insurance Corp. released Thursday, loans made by U.S. banks to small businesses declined 1.9 percent over the year, while loans to larger businesses essentially remained flat.
It's too early to determine the effect of recent proposals for small business. The lawmakers who have called for providing them greater access to capital have provided few details on what they might do. Provisions in the federal stimulus mostly focus on loans backed by the Small Business Administration, but less than 1percent of small businesses have an SBA or other government-sponsored loan, according to the National Federation of Independent Business. The NFIB is pushing for the government to purchase shares of small-business loans, which it says would enable banks to make more loans because they'd be sharing the risk with the government.
On the front lines, Bank of Granite Corp. in Granite Falls is one of the many community banks that has modified some loans for struggling small businesses. “That's what a community bank does – try to work with their clients and make the best of any situation,” said CEO Scott Anderson. “If the company disappears, nobody wins.”