Fed Kicks off Small Business Financing Summit

The Federal Reserve kicked off it's forum Monday on the needs of cash- and, now, credit-strapped small businesses in Washington, DC with an address by Fed Chairman Ben Bernanke, who called for more effort on the part of government agencies and more lending on the part of banks.

Bernanke opened "Addressing the Financial Needs of Small Businesses" echoing the Fed's long-held sentiment that financial institutions simply aren't lending enough to worthy business borrowers. He also touched on the fact that Fed's efforts to date have not solved credit problems for such entities, and that more needed to be done on their part and that of other government agencies for the good of U.S. small businesses and the greater economic recovery as a whole. He also warned that inter-agency collaborative and flexible efforts would be needed because America's small businesses run the gamut from pizzerias to start-up technology firms. "We should be wary of one-size-fits-all solutions," said Bernanke.

The chairman, who didn't get too far into specific solutions during his brief speech, focused heavily on a series of more than 40 meetings nationwide with between Fed officials and small business owners as well as lenders in recent months:

"Some common themes emerged from the sessions. Business owners frequently noted that the declining value of real estate and other collateral securing their loans poses a particularly severe challenge. As one business owner at the Detroit meeting I attended put it, ‘If you thought housing had declined in value, take a look at what equipment is worth.' Business owners cited credit lines and working capital as their most critical financial needs, followed by refinancing products that would permit them to take advantage of low interest rates. Many reported having had to resort to borrowing through their personal credit cards or from their retirement accounts. Several mentioned the need for small-value loans in amounts less than $200,000 as well as the need for "patient capital" from investors willing to commit funds for 5 to 10 years without an expectation of immediate returns...

Some of the lenders that participated in our meetings expressed the view that current lending conditions don't represent credit tightening as much as a return to more traditional underwriting standards following a period of too-lax standards. But, though some lenders said they were emphasizing cash flow and relying less on collateral values in evaluating creditworthiness, it seems clear that some creditworthy businesses--including some whose collateral has lost value but whose cash flows remain strong--have had difficulty obtaining the credit that they need to expand, and in some cases, even to continue operating. The challenge ahead for lenders will be to determine how to assess the credit quality of businesses in an uncertain and difficult economic environment. It is in lenders' interest, after all, to lend to creditworthy borrowers; ultimately, that's how they earn their profits. Regulators, for their part, need to continue to work with lenders to help them do all that they prudently can to meet the needs of creditworthy small businesses. Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges."

To view the speech in its entirety, click here. NACM staff writer Jake Barron is reporting from the Fed's small business financing forum, and coverage will be available in the upcoming edition of eNews on Thursday.

Brian Shappell, NACM staff writer

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