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What follows here is a recent official statement from “the examiners.”  On February 2, 2010 the President made a proposal for a Small Business Lending Fund (SBLF).

On February 4, 2010 the Federal and State examiners issued the joint statement included here.

I won’t bore you more than the reading of this official statement already does, but suffice it to say that in practice, when the examiners arrive at a fine well run community bank, the treatment is not consistent with promoting lending to small businesses.

If you cannot bear to read the entire statement, just read the last two sentences.  I think community bankers will agree that these sentences will come as a surprise to field examiners!

Our entire economy is built on the backs of small businesses and our community banks are our first line of defense.  What is good for community bankers is good for small businesses and what is good for small businesses is good for America.

For those of you who genuinely care about small businesses, I will write more later about what we need to tell our government, and hope to heaven they will listen.

In the meantime, if your community banker is tied up with regulators and simply cannot increase your line or make your working capital loan, there is a chance we can help.  We will try to step in the gap until your bank gets the liquidity and freedom it needs to lend again.

Your difficulty getting funding may well not be your fault and it certainly is not the fault of your banker.  But together, we can make it through.

Here is the Interagency Statement:

“Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers

The federal financial institutions regulatory agencies1 and the state supervisors 2(collectively, the “regulators”) are issuing this Interagency Statement on Meeting the Credit Needs of Creditworthy Small Business Borrowers (the “Statement”) to restate and elaborate their supervisory views on prudent lending to creditworthy small business borrowers.3

This Statement builds upon principles in existing guidance, including the November 2008 Interagency Statement on Meeting the Needs of Creditworthy Borrowers and the October 2009 Policy Statement on Prudent Commercial Real Estate Loan Workouts.

The regulators note that while the October 2009 statement focused on commercial real estate, many principles articulated in that guidance are applicable to small business lending.

Some small businesses are experiencing difficulty in obtaining or renewing credit to support their operations.4 Between June 30, 2008, and June 30, 2009, loans outstanding to small businesses and farms, as defined in the Consolidated Report of Condition (Call Report), declined 1.8 percent, by almost $14 billion.5 Although this category of lending increased slightly at institutions with total assets of less than $1 billion, it declined over 4 percent at institutions with total assets greater than $100 billion during this timeframe.

This decline is attributable to a number of factors, including weakness in the broader economy, decreasing loan demand, and higher levels of credit risk and delinquency. These factors have prompted institutions to review their lending practices, tighten their underwriting standards, and review their capacity to meet current and future credit demands. In addition, some financial institutions may have reduced lending due to a need to strengthen their own capital positions and balance sheets.

Supervisory Expectations

While the regulators believe that many of these responses by financial institutions are prudent in light of current economic conditions and the position of specific financial institutions, experience suggests that financial institutions may at times react to a significant economic downturn by becoming overly cautious with respect to small business lending.

Regulators are mindful of the harmful economic effects of an excessive tightening of credit availability in a downturn and are working through outreach and communication with the industry and supervisory staff to ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small business borrowers.

Financial institutions that engage in prudent small business lending after performing a comprehensive review of a borrower’s financial condition will not be subject to criticism for loans made on that basis.

1 The federal financial institutions regulatory agencies consist of the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, and the National Credit Union Administration (collectively, the “agencies”).

2 The state supervisors are represented through the Conference of State Bank Supervisors.

3 Financial institutions should apply the principles of this Statement in accordance with their internal definitions of small business loans or as appropriate in their loan portfolios. Small business lending includes loans to small businesses and farms, such as working capital lines of credit, secured and unsecured term loans, as well as unsecured revolving credit.

4 Responses to the Federal Reserve Board’s Senior Loan Officer Opinion Survey indicate that the net fraction of banks that tightened credit standards and terms on C&I loans to small firms was very high in 2009, and exceeded its previous highs in the past twenty years.

5 The data is for commercial banks, where small business loans, as reported in the Call Report FFIEC 031 and 041, schedule RC-C, part II are defined as loans with original amounts of $1 million or less that are secured by nonfarm nonresidential properties or commercial and industrial loans plus loans with original balances of $500,000 or less for agricultural production or secured by farmland.

Underwriting and Risk Management Considerations

An institution should understand the long-term viability of the borrower’s business, and focus on the strength of a borrower’s business plan, including its plan for the use and repayment of borrowed funds. The institution should have an understanding of the competition and local market conditions affecting the borrower’s business and should not base lending decisions solely on national market trends when local conditions may be more favorable.

Further, while the regulators expect institutions to effectively monitor and manage credit concentrations, institutions should not automatically refuse credit to sound borrowers because of a borrower’s particular industry or geographic location. To the maximum extent possible, loan decisions should be made based on the creditworthiness of the individual borrower, consistent with prudent management of credit concentrations.

For most small business loans, the primary source of repayment is often the cash flow of the business, either through the conversion of current assets or ongoing business operations. An institution’s cash flow analysis should cover current and expected cash flows, and reflect expectations for the borrower’s performance over a reasonable range of future conditions, rather than overly optimistic or pessimistic cases. Many small business borrowers also rely on their personal wealth and resources to support loan requests.

A borrower’s credit history and financial strength, including credit score, are components of assessing willingness and ability to repay, and should be considered in conjunction with other judgmental factors, such as the strength of management. The loan structure should be appropriate for meeting the funding needs of the borrower given the type of credit and expected timing of the business’ cash flow.

Further, an institution should analyze the secondary sources of repayment, such as the strength of any guarantor or collateral support, and the ability of the borrower to provide additional capital. Institutions should not place excessive reliance on cyclical factors, such as appreciating or depreciating collateral values.

An institution should have robust risk management practices to identify, measure, monitor, and control credit risk in its lending activities. Further, institutions should promote a credit culture in which lenders develop and maintain prudent lending relationships and knowledge of borrowers. This culture should encourage lending staff to use sound judgment during the underwriting process. While institutions may use models to identify and manage concentration risk, portfolio management models that rely primarily on general inputs, such as geographic location and industry, should not be used as a substitute for the evaluation of an individual customer’s repayment capacity.

Examination Reviews

Examiners will not discourage prudent small business lending by financial institutions, nor will they criticize institutions for working in a prudent and constructive manner with small business borrowers. Examiners will expect institutions to employ sound underwriting and risk management practices, maintain adequate loan loss reserves and capital, and take appropriate charge-offs when warranted.

As with all lending, examiners are expected to take a balanced approach in assessing the adequacy of an institution’s risk management practices in its small business lending activities. As a general principle, examiners will not adversely classify loans solely due to a decline in the collateral value below the loan balance, provided the borrower has the willingness and ability to repay the loan according to reasonable terms. In addition, examiners will not classify loans due solely to the borrower’s association with a particular industry or geographic location that is experiencing financial difficulties.”

(We can only hope)

Long Long Ago in a city a lot like Houston, Texas I learned a valuable lesson. Paraphrased it sounds a lot like “Seek more to serve than to be served.”

Well, at least I thought I had learned that lesson.  Yesterday, I met a very beautiful lady with years of experience and loads of very important friends. Sitting in the room with her I felt like the grandmother that I am.  That is I felt like that until…

Until I asked myself how I could help this beautiful, successful, lovely lady.   You see, servant leadership only counts when you actually apply it.

On the surface it would seem that she needed nothing from me.  She had it all. But I managed to quit comparing myself to her and her enormous success.  I actually managed to think of her and not ME, though admittedly it took a while.  I began to listen with the purpose of finding out how I could help her.

In the end I learned that she has a tremendous responsibility to put on a conference and she needs some breakout sessions of real interest to the attendees.  I introduced her to the work of the I-Opt Survey of Information Processing Styles and explained that I would be glad to teach a session on it to her attendees.

I don’t know if she will actually decide to use me in that role but in the process I had introduced her to a valuable tool she can use in her own business.  I had helped her.

That is how simple Servant Leadership is.  Seek more to serve than to be served.  It isn’t all about me.  And it isn’t about you either.  It is about how we can help each other.

Because we serve small businesses when they most need working capital, other business and financial professionals frequently call us to ask what is happening with the economy.

We are not economists, not accountants and not futurists.  We are more accurately compared to a barometer.  We know when the pressure is rising.  In 2009 there was a confluence of decreased capital along with decreased demand.

Usually, when there is a tightening of credit or capital there will be an increased demand for our funding to meet working capital needs.  In general, this was not true in 2009 because simultaneous with the freeze in the capital markets, there was a sudden drop in demand.

Our seasoned and stable clients were able to weather the storm because they were not heavily laden with long term debt.  They used our services to meet payroll and fill existing orders.  Then, the “great wait and see” began.

There was a collective “breath-holding” among the major large companies who use the goods and services of our clients.

Well, we now think there has been a collective sigh.  It is not a strong wind but a noticeable sigh.  It seems like our clients are experiencing an up tick in demand for their goods and services.

I know this is not scientific evidence of a turn in the economy.  It is simply the result of over 20 years of watching from the ground level how our economy actually works.  So, be encouraged.

According to Russia Today, it is so difficult to get financing that one loan company is asking people for their immortal soul for collateral! (see http://russiatoday.com/Art_and_Fun/2009-06-19/Got_soul_Here_s_your_money_.html)

Fortunately, with American Prudential Capital, we are able to help companies fund their stability and growth without such collateral.

We factor a company’s business-to-business accounts receivables (invoices) and provide them with 80% of the funds within 24 hours of approval. When the invoices are paid, we forward the remaining payment to the company minus an agreed upon fee.

No need to wait on clients to pay in 50.8 days (average) or worse!

No long term debt to repay!

No loss of ownership (equity) in your company or your soul!

Plus (+), we are much more fun to work with than someone who thinks that they can hold your soul hostage! Ahhh, you can really rest in peace.

Small businesses created more than 60 percent of all new jobs in the past decade; today, about half of all private-sector jobs in the United States are at small companies like Moore’s. They generate more medical and technological patents per employee than big corporations, and history shows that they’re the first to begin hiring at the end of a recession. In short, small business has long fueled our country’s growth and expansion. But that’s the insidious trap of the current credit crunch — it’s threatening to squelch American innovation, which could hold the key to our recovery.

via Room to Grow: Economic Trouble for Small Businesses | Your Money Guide | Reader’s Digest.

Our firm specializes in funding these companies.  We can help.

Eric Standlee

In a recent Reader’s Digest Article “Room to Grow: Economic Trouble for Small Businesses“:

“With banks in lockdown mode, small businesses with big potential are being stifled. Why Main Street innovators matter to us all.”
“If you want to understand what’s wrong with the economy, consider Deborah Moore. After working as a nurse-practitioner for 15 years, Moore launched a medical transcription company from her home seven years ago, mostly to be closer to her two kids. The company, called AccuStat EMR, has grown dramatically: Moore still handles transcription services, but she also helps hospitals transfer their records from paper files to electronic documents. Since the federal government wants most hospital records to be stored electronically by 2014, it’s a booming business. Moore has big clients, like the University of North Carolina Student Health Center, Beth Israel Hospital in Boston, and the Missouri Department of Corrections, and her revenue in 2008 was $35 million. Her only problem? She can’t get a loan.”

American Prudential Capital has 20 years of history on the side of businesses like this. We help these businesses grow despite their inability to get business loans.

Eric Standlee

When an entrepreneur sets out to start a new business the main focus is usually the product or service to be provided. After all that is where our passion lies. As entrepreneurs, we believe in our products and services. We believe essentially in our ability to make a difference; to make things better.

Eventually, however, the focus turns to money. To make things better is going to take money. The old adage that, “it takes money to make money,” is usually true. The question is, “whose money?” Initially, entrepreneurs turn to the readily available sources, friends and family. That is, they turn to friends and family after they have exhausted their personal funds. This usually works to get the business up and running.

The first sales come in and delivery occurs. Then the orders start to grow and the success of the business seems to ride on the wave of the daily cash flow. Eventually, receipts do not match expenses in a timely manner and the entrepreneur begins to think of finding additional capital.

Then comes one of the critical points in the development of the small business, the search for third party financing. Usually the budding entrepreneur goes to the bank that has been handling his or her business accounts. Unfortunately, the business is very young without a significant track record and without much equity built up.

No matter how much the banker likes the entrepreneur and no matter how much the banker believes in the product or service, the banker will not be able to justify lending money to the entrepreneur. Bankers are not without feelings; they hate saying “no” under any circumstances. The banker wants to keep the entrepreneur’s business.

But, banks are regulated and they are regulated for good reasons. Banks lend “other people’s money.” The money that I deposit today may very well be loaned to another business tomorrow. Banks need to be very careful. So they have formulas, ratios, guidelines and rules.

If the emerging entrepreneurial business has assets like certificates of deposit, land, or stocks and bonds, the banker can usually work out a loan of equal value backed by the assets. But few entrepreneurs have such assets available to pledge to the bank. So, the banker has to turn down the loan application. Where does the entrepreneur turn then?

The enthusiastic entrepreneur usually begins to seek equity investors at this point. This has some advantages. It is available to some early stage ventures. It has disadvantages, too. The entrepreneur will most certainly lose control of the company. The equity taken at this early stage will require majority control.

Now, loss of majority control is OK if the entrepreneur and the investors have the same exit strategy. Usually, they do not. Usually, the entrepreneur is thinking long term and the early stage investor is thinking 5 years maximum. Five years passes very quickly as the entrepreneur works thorough business cycles, economic cycles, personnel cycles and ever growing competition.

The problem is that at the end of a very short period of time in the life of the business, the entrepreneur is back at square one trying to raise more money. Only this time the entrepreneur needs to raise enough money to take out the investors and ensure the survival of the business. This brings a whole new group of investors and with them new exit strategies.

Is there any other way? For some businesses, the answer is a resounding YES, THERE IS. If the business started by the entrepreneur is a business-to-business venture, in other words, if the business sells its goods and services to other businesses, then the answer is a definite YES. The entrepreneur can sell his or her completed invoices to a factor at a discount.

The advantages are many. The most important advantage is that by selling the invoices the entrepreneur gets immediate cash. No long-term debt is created, no loss of equity occurs, control does not go to a third party, no “exit strategy” issues arise, lines are easily increased, and it is self-liquidating, to mention just a few.

Entrepreneurs whose businesses engage in B2B, business-to-business, sales have the opportunity to grow their enterprises under the “Self-Sustaining Business Model” for several years, and sometimes for the life of the business. Factoring works in the entrepreneurs favor.

According to third Quarter Earnings Reports, Wachovia has seen a 285.8% increase in non-performing assets. At the same time they have increased their loan loss provision from 108 million to 408 million.

During the same time Bank of America has seen an increase of 103.6% in non-performing assets with an increase of 74.2% in their loan loss provision.

Regions and Citigroup have posted similar figures. JP Morgan Chase’s increase in non-performing assets was up 50.7% and their loan loss provision went up 119.8%.

The numbers show both the actual situation and their view of the future. Banks are tightening up and they are in need of alternative sources of revenue. We ARE the answer. We can deliver.

At the very least, these banks will have assets that are under-performing and need to be moved from the bank. We can help.

This is a very good time to be calling regularly on every banker you know. The pressure to “clean up the portfolio” will be very strong in 2008.

Thanks for all you are doing and I look forward to a very exciting year for all of us.

American Prudential recently signed up a new client who is new in many ways. In business for less than 18 months, this client has done everything possible to get his business off and running. And after a year they have exhausted all of their available capital.

The equipment is all purchased, the staff is hired and trained and the orders are getting filled. Unfortunately, without additional capital only low margin orders can be filled because the larger deals require more materials and more materials cost more money.

At just the right moment, this budding company’s alert banker called in American Prudential Capital. Knowing that the bank could not approve a loan yet for this emerging business, the banker knew what to do in the interim. With American Prudential Capital involved, this well positioned company will be able not only to grow but to grow with the right kinds of orders.

Being able to order quantities of materials and to fill large orders enables this firm to respond to those higher margin deals with confidence. They know they will have the working capital necessary to fill and deliver all the new orders.

Sharp bankers who understand the complete life cycle of emerging businesses know that working with American Prudential Capital will help them help their clients. Together we build new small businesses for the community. Healthy small businesses create the majority of new jobs in any community. So, together we are building a better job market and a stronger economy.