Credit is too restricted, especially for small businesses, according to Ben Bernanke, the chairman of the Federal Reserve Bank, and he’s making speeches to get the word out. The marine industry has been saying the same thing for months, but such high level acknowledgement is a sign that change may be underway and now might be the right time to renew efforts to seek out funding.
As Bernanke spreads this message to the lending community, he is also sowing the seed that small businesses – and consumers – should step up their consumption and borrowing habits to take advantage of newly sprung funds that appear to be flowing. It is a classic yin and yang balance where one action must have a counterweight for both to thrive.
The chairman’s comments came in a speech describing the effects of so-called stress tests to determine the health of banks and restore stability to the banking system. The tests were also intended to foster a better lending environment.
Said Bernanke in May, “Clearly that [last] objective has not yet been realized, as bank lending continues to contract and terms and conditions remain tight … Businesses need access to credit to maintain or expand their payrolls and make productive investments. And banks need to make sound loans to preserve their earnings stream, absorb credit losses, and support capital growth, as necessary.”
In the Fed’s Senior Loan Officer Opinion Survey on Bank Lending Practices for the first three months of 2010, consumers perceived that banks were less willing to lend. Banks tightened their standards for credit cards, but loosened other kinds of consumer credit, including installment loans and home equity lines of credit. Roughly 31 percent of banks said demand for consumer loans had declined in the first quarter, compared with 14 percent who said demand had strengthened and 56 percent noting no change.
In the typically understated language of Fed officials, Bernanke delivered a kernel of hope to commercial borrowers saying, “For the first time since the crisis began in the summer of 2007, banks reported no net tightening of lending standards for small businesses.”
Throughout the credit meltdown, banks were saying the Fed pressured them to keep their capital ratios high to cover bad loans, but simultaneously make good loans. As banks raised credit requirements, their pool of “good enough” borrowers shrank. Recently, banks have been hearing less about capital requirements and a lot more about pushing money out. The Fed and other regulatory agencies are shifting focus to encourage prudent lending and need banks to loosen to do so.
The campaign to encourage lending launched in February when the Fed and related regulatory agencies and the Conference of State Bank Supervisors reminded banks of small businesses’ important role in the economy and their difficulty in obtaining or renewing credit. Financial institutions were advised to focus on the strength of a business plan to manage risk rather than using portfolio management models that rely primarily on general inputs, such as a borrower’s geographic location or industry. Regulators said they intended to work through outreach and communication to ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small business borrowers.
“Small Business Credit in a Deep Recession,” a recent study by the National Federation of Independent Business undertaken with assistance from the Fed, reported generally favorable relationships between small businesses and their existing lenders, mostly major commercial banks. But when asked about acquiring new loans, the report noted, “Today, half of those small business owners who want to borrow cannot, a much lower success rate than just five years ago.
With the Fed now supporting more lending and borrowing, business owners should be encouraging all manner of lenders – major, regional and community commercial banks, SBA-affiliates and credit unions – to increase, restart or begin the flow of funds to boating.
A visit with lenders who previously denied loans may result in a different outcome now. Don’t hesitate to tell them that Ben Bernanke sent you!
Greg Proteau writes about boating and marine finance industry trends, companies, people and ideas. He served as director of communications and PR for the NMMA and was the founding executive director of the National Marine Bankers Association. Currently he is a consultant to manufacturers, marketing agencies, service providers and organizations within and outside the marine sector and serves as executive director of Boating Writers International.