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NEWSROOM * CIRCULATION * ADVERTISING
Monday
March 2010
22
Community Blogs
Why Large Banks Don't Make Loans to Small Businesses --- After Receiving Bailouts and TARP Money
There is a lot of talk on the news and in the papers about the reluctance of banks to give small businesses loans, and how that reluctance is part of what is keeping our economy from rebounding.
Maybe one reason that the banks are not giving out lines of credit to small business owners, is because the banks have figured out how , in many cases, to extort obscene profits from the captive small businesses.
The scheme that the banks use is geared towards small businesses that are dependent upon billing out for their services, and receiving payment by check. Small businesses that work primarily in cash (fast food, storefront retailers, etc) have some immunity.
Here is how it works:
Acme provides services to other companies. When they receive an assignment, they schedule the work, buy the necessary materials, and assign worker(s) to the job. They write a check for the materials, and at the end of the week or the next week, they pay their labor.
Acme’s costs are almost immediate. And in a very slow economy like the one we are in, their orders are probably way down from previous years, and there is not much of a cushion between costs and billings.
Work is now completed, and Acme bills out the job, let’s say the bill in this case is for $1,000 even. If the billing is to a very good customer, or another small business, they will usually see their money in about 30 days (a month after they have already paid for the materials and labor) --- but if their customer is a large corporation, there is a very good chance that it will be 45 or 60 days before they get paid, as large corporations can, and do, use their payables as a floating line of credit when they need to …… in essence, taking a loan out from their vendors.
Acme is lucky on this job, and they do get payment of $1000 in about 30 days from the date of invoice. But that does NOT mean that they have their money yet.
They deposit the $1000 check into their business checking account at ABC bank down the street. ABC is a large bank operating is several states with over one hundred locations.
Since the check that Acme has deposited is from a company in another state, ABC puts a 5 business day hold on the check (7 normal days). This means that the $1000 is NOT available for use by Acme for another week.
In reality, ABC has put the check for $1000 into the Federal Reserve Clearing, and ABC receives interest for every day that check is in the Fed! That is the overnight rate that the Fed pays to banks. Of course when the money is out of the Fed, the bank uses it to makes loans and again, makes interest on the $1000 that Acme does not have access to yet.
It is worth noting, that virtually all the check transactions nowadays are done electronically, and the bank has probably received the $1000 for the check the day after they put it into clearing.
So the bank has the $1000 for a week and making money on it, while Acme is still waiting. But the best part For the Bank is yet to come. ABC gets more chances to make even more money off this transaction!
Acme has to write checks to its vendors and suppliers, and there are also monthly billings from their insurance company, vehicle loans, and other payables, that are automatically withdrawn from Acme’s checking account with ABC.
As luck will have it, during the float time that ABC is keeping the funds unavailable to Acme, some of those automatic withdrawals hit Acme’s account, and virtually used up all the “cleared” funds in the ABC account. When ABC deposited the check, they already had $3500 in the account that was cleared, and with the deposit, they have $4500 in their account, but there is that 7 day hold on the $1000.
After the automatic withdrawals, Acme’s “cleared funds are $750. Seven checks that Acme has written, totaling $1500 come into the account. There is a check for $900, and then six more checks for about $100 each.
ABC bank receives all seven checks the same day. It processes the $900 check first, which is $150 more than the available funds that Acme had in its account (there is still the $1000, but it won’t clear for 2 more days). So Acme’s “available funds” in its checking account are overdrawn by $150.
ABC bank charges Acme a $35 charge on the $900 check, for overdrawing the available balance. It then proceeds to pay the other 6 checks, at an additional charge of $35 per check. It has now assessed Acme $245 in overdraft fees.
When ABC finally clears the $1000 deposit two days later, it deducts the $245 in overdraft fees, so Acme only has $755 left of the original $1000. If Acme was making a 25% gross profit on that job which would be $250, they have now only $5 of that left.
In essence, ABC bank has “loaned” Acme $1500 for two days in covering the 7 checks, and made a return of $245 on the $1500 loan (16% interest for two days). A very bad deal for Acme --- a hell of a good deal and Great Profit for ABC!!! Remember, $245 for two days --- what astronomical figure is the interest rate based upon an annual basis???
I would suggest that the answer to the question I put forth above “Why Don’t Banks Want to Provide Loans to Small Businesses --- Even after the Government Bailouts and TARP Money the Banks Received?” is obvious.
Why in the world would a bank provide a small business person a loan or line of credit, at any imaginable annual rate (10%-15%-18%) when they can collect 16% on a two day loan?
By the way, this banking scheme, as many of you may know, is also used on individuals.
Please note that banks have not always been this predatory. In my own experience, I was with a large bank for about 15 years, and during most of that time, I could work with a branch manager and expedite the clearing of funds. But starting about 4 years back, they stopped helping to work with their customers, and took a “scorched earth policy” instead.
There is also some hope with SMALL banks. There are still a few (very few) small banks and savings and loans, that really do want small business and consumer business, and they will work with their customers. You have to look really hard to find them, but they do exist.
In my opinion the Large banks have done their expansions and buyouts, and they really don’t care much for small business or consumer customers. When they can borrow Billions from the government (us) and when their executives have paychecks larger than the budgets of most of the Milwaukee suburbs --- they just don’t care anymore…….
WHAT DO YOU THINK? YOUR COMMENTS ARE WELCOME!
David, you are probably correct with your analysis. I am just wondering, what do you think of the administrations present proposal to tax all the banks that got the bailout, paid it back, plus interest? Supposedly, the banks that didn't get the bailouts will also be taxed. The auto companies on the other hand, who also got the bailouts (not paid back), do not have to pay that tax because they are unionized. Would you say that is major payback? In my opinion, this is pretty unconstitutional stuff but apparently they don't care. Advise!
It is easy to detrmine which end of the spectrum that Gordy 1 is coming from. If we were to have a true free enterpise system, the government would have kept out of everything, even the bailout of banks and the hell with the auto industry.
If this country doesn't increase its production base including autos, we've had it. What are 20 million undemployed going to do to our country if they remain without jobs for long? Revolutions aren't good.
The banks are supposed only to keep our money safe. It's when they start spectulating with that they get us in trouble.
Our free entrprise system needs to take a long look at the banking system and Wall Street. Is it really working in the inteest of our free entprise and in the interest or our democracy?
Gordy 1 and joemanwood
Thanks for your comments guys.
In my belief, the first thing we have to remember is that there are NO absolutes in economic systems ... ie. Capitalism, Socialism, communism, any other ism's .......
In fact, I do not know of a single country that runs its economic system under any PURE form ---- each one is a blend. (ie. The United States is NOT laissez faire which would be the epitome of Capitalism ... we are definitely more socialist that capitalist any way you look at it)
Secondly --- the first rule of any economic system is that the Rules are Artificial and Subject to Change !!!
Example: Who decided to use money instead of barter ? How much is a dollar worth today, vs tomorrow or yesterday .. who decides ? What is an acceptable level of unemployment --- would you be surprised that the Federal Reserve considers 6% unemployment as the ideal, and has policies to increase it if it drops below that ? Who is responsible for the unemployed ? What interest rate is paid ? What is the capital reserve requirement for banks and insurance companies and how are they decided ?
Why do we embargo pineapples from Jamaica with high tariffs, keeping Dole Co happy, while we send out high paying jobs overseas to China in factory jobs ?
One of the main reasons that things are as they are, is because the government and politicians get the public to think in terms of the status quo --- your questions do not concern fundamentals of why we have what we have, but are about what is already structured.
We need to look at the BASE CORE OF EVERYTHING WE DO --- START WITH A TABULA RASA AND DON'T ASK HOW MUCH, BUT FIRST OF ALL WHY --- THEN WE CAN FIGURE OUT HOW MUCH TO SATISFY TO ACHIEVE THE OBJECTIVE WE HAVE ESTABLISHED WITH THE WHY QUESTION
Sorry to get carried away with caps -- too lazy to re-type without :-)
Keep up the discussion --- we really need it !!!
Dave
Joe, I don't get what you mean about what side of the spectrum I am from? I just made a comment and asked David for advise. He respectfully responded and I appreciate that and basically agree. However, I will admit I lean to the right after following all the corruption that is presently going on and the lack of transparency in all of it. Nothing is perfect, no doubt, but things have really gotten out of hand. I will admit that I enjoy commenting on this blog as compared to Lester Schultz because when I make ANY innocent comment, it is ripped, torn, dismembered and chastized. Therefore, I simply try to defend my comment. It is not Lester that does the ripping but those who enter the blog. Oh well!
Gordy1 & Joe
I do appreciate both of your comments.
I try to run a nice, warm, fuzzy blog here :-)
Actually, I think almost all of the comments from readers to this blog have been very civil and thoughtful for the most part.
I do think that it is best if folks who write in comments not label other readers, as statements can often be interpreted in several different ways. Having said that, feel free to criticize whatever I say directly -- I'm the cook and I have to take the heat in the kitchen ...........
I have seen some other blogs in which everybody is going ballistic -- and it is hard to intelligently discuss issues that way.
I learned a long time ago that there is seldom once correct answer to any question --- and good answers aren't always correct.
Dave
A timely Blog posting David. I read that the Obama Civil Rights Division is starting this new racist program called "The Wall Street Project" to scrutinize lending practices amid the subprime mortgage boom i.e. to blame Whitey again.
People have to realize that any sensible lending policy will have disparate impact on blacks because blacks as a whole are poor credit risks. They're more likely to default on a loan that a white person even when they have the same income. So the law says we must have foolish lending policies, and look where it’s got us.
These liberals in Obama's inner circle must have learned by now that all these measures do not work and will not ever work. Of course to admit that, however, means they will have to admit that certain ethnicity's are, on average, unable to reach the same levels of responsibility as whites. The liberals whole worldview would thus be destroyed. So, like flat-earthers, they will continue to spout their racist economic theories for God knows how long.
Ares, isn't it a joy to make a comment on THIS blog and not be destroyed personally by the folks on Schultz's blog? Rational comments abound here, unlike the other one. I really do feel sorry for them for they know not what they do! Sound familiar? Ha!
Hi Ares
You do have some interesting theories.
I can't say that I have run an extensive study on your theory of racial incompetence regarding mortgages, and I am not really inclined to do so to challenge your stand.
However, I do have about 10 years worth of anecdotal experience in this area, as I am a real estate broker, and worked with Blacks, Latinos, Hmong and Caucasians --- with a mixture of Conventional, BC, and FHA mortgage loans.
In my anecdotal experience, no one group has proven to be any more reliable than any other, on a basis of race. On other basis, such as the type of buyer --- owner occupied Single Family, owner occupied 2 to 4 unit, non-owner occupied, investment, and commercial, there are striking differences.
(CONTINUED NEXT COMMENT)
(Ares Continued)
There are also striking differences on the type of mortgage loan the buyer was able to get: ARM's, FHA, Conventional, BC ----- and who the lender was --- bank held paper, bundled packages sold on the market, and who processed the loan, mortgage broker, loan officer at bank, etc..... Mortgage brokers were paid more on different types of loans, and many of them had no compunction whatsoever in placing a product with higher costs and risks with a buyer, if the mortgage company made more money on the deal.
OH --- there is ONE aspect of Race that did enter into a lot of deals that I was involved with, now that I think about it. A first time Black buyer was more likely to come to me with a pre-qualification from a mortgage broker that was an absolute rip-off, than was the case with most White buyers.
There are a whole lot of former mortgage broker loan officers out there who are ticked off at me, for educating their Black client that they were more than qualified for an FHA or Conventional loan, without the ripoff terms, closing costs, and interest rates that was being offered to them.
Not that there were never any Whites who didn't need educating --- but there were a number of mortgage brokers that had a record of selling the inferior product to the Black person, while offering a better product to the White person.
Like I said, this is only my anecdotal experience.
If you are interested, it would be great if you did research on this to see if I am right or wrong ........... you can start with Fanny Mae, Freddie Mac, the FHA, HUD, etc ........ plenty of info on their websites.
Dave
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Tags: Banks : Small Business Loans : Bank Schemes : Overdraft Charges : Federal Reserve : Check Clearing : Overnight Rate : Funds Availability : Cleared Funds
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