It shouldn't be a surprise that big banks are more comfortable dealing with large businesses | Community banking

According to the Washington Post, "White House, GOP face heat after hotel and restaurant chains helped run small business program dry."  From the article:

The federal government gave national hotel and restaurant chains millions of dollars in grants before the $349 billion program ran out of money Thursday, leading to a backlash that prompted one company to give the money back and a Republican senator to say that “millions of dollars are being wasted.”

Thousands of traditional small businesses were unable to get funding from the program before it ran dry. As Congress and the White House near a deal to add an additional $310 billion to the program, some are calling for additional oversight and rule changes to prevent bigger chains from accepting any more money.

Ruth’s Chris Steak House, a chain that has 150 locations and is valued at $250 million, reported receiving $20 million in funding from the small business portion of the economic stimulus legislation called the Paycheck Protection Program. The Potbelly chain of sandwich shops, which has more than 400 locations and a value of $89 million, reported receiving $10 million last week.

As Stacy Mitchell of the Institute for Local Self-Reliance says "The Small Business Administration is set up to help small businesses become big businesses." (She happens to be featured in a NYT article on Amazon, "As Amazon Rises, So Does the Opposition.")

This shouldn't be a surprise.  There's been tons of writing about the impact of community banks on local business ecosystems, and how as these banks have consolidated with larger banks, the focus on small business lending is dissipated.

Similarly, ever since reading the textbook Social Psychology of Organizations and the Kirkpatrick Sale book Human Scale, I've understood that large organizations--and that includes governments--are more comfortable dealing with larger organizations than smaller ones.

That's why it's hard for small organizations to get government contracts, etc.

Besides directing monies to community banks and CDFIs--community development financial institutions--specifically as part of such initiatives, it would be possible for the large banks to develop "banks within the bank" to focus on small businesses.

-- "Let community banks and nonprofit lenders give small businesses emergency coronavirus PPP loans, Pa. congressman says," Philadelphia Inquirer

But that would be pretty hard, and the economies of scale probably aren't there--just like how the big airlines were never successful in creating subsidiaries designed to provide low cost seats to compete with Southwest Airlines and similar companies.

Better to just focus on creating and maintaining a system of smaller, community banks focused on local markets and local businesses.

Community banks in the face of redlining.  There is a section in Death and Life of Great American Cities where Jane Jacobs describes a road trip and being shocked at a particular area of a big city having a thriving business district and residential neighborhood.

When she looked at it more closely, she discovered that the neighborhood retained a community bank committed to making loans in the local community, unlike the larger banks, which were "redlining" such communities and denying loans.

Building a local economy vs. "economic development" and the multiplier effect.  But this kind of lending or business activity, I call the difference between "building a local economy" versus "economic development."

Too often economic development doesn't look more carefully at the community economic "multiplier effect" of economic activity of businesses.  Locally owned  businesses recirculate more money within the community, while businesses elsewhere "repatriate" revenues to their headquarters community, which is also where they tend to hire and utilize ancillary services.

Graphic from Yes Magazine.

Studies on this have been done for local communities and various retail sectors, when it comes to the economic value of chain stores versus locally owned businesses.   The consulting firm Civic Economics has performed these studies around the country.

The National Hardware Retailing Association, the American Booksellers Association, and the American Independent Business Association have commissioned such studies as well.

-- The Multiplier Effect of Local Independent Businesses, AMIBA
-- Study: Shopping Local vs. Amazon Makes Powerful Impact," Hardware Retailing
-- Local First and Economic Impact Studies, American Booksellers Association

Opposition to large tax credits for businesses, like FoxConn in Wisconsin, have to do with this kind of analysis too, over how much of the business activity further generates local economic activity.

Years ago, Aaron Renn wrote about how once Anheuser Busch was acquired by a non-US company, they eventually stopped hiring advertising firms based in St. Louis ("St. Louis and the Consequences of Consolidation," New Geography)

Less diverse loan portfolios can be more risky.  Note that a counter argument is that community banks can be overexposed to risk by focusing too much on a local community so that when times go bad, many of the loans become nonperforming.

This New York Times Magazine article, "Why New Orleans's Black Residents Are Still Underwater After Katrina," discusses Liberty Bank of New Orleans and the extra effort it took to protect its clients post-Katrina.  That's not the kind of effort that a typical "money center" bank will go towards.

But also how at the time the bank's future was uncertain, because much of its lending was centered in the areas of the city most impacted by flooding.

Plenty of community banks have had such problems over the years since I've paid attention, for example South ShoreBank in Chicago ("Chicago's ShoreBank fails, is bought by investors," Chicago Tribune, 2010). I read a book about ShoreBank in the mid-1990s, Community Capitalism: The South Shore Bank's Strategy for Neighborhood Revitalization.

And banks owned by labor unions, African-American and other ethnic focused banks, often run into problems during bad economic times, etc.  (Sometimes, it's abetted by self-dealing.)

State banks. An option is to have a broader customer base, and operate at the scale of a state. North Dakota has a state bank that makes community oriented loans ("The Case for a State-Owned Bank," Governing Magazine).

Rural credit system. Similarly, the USDA helps to fund rural development through the Farm Credit system ("Do You Understand The Farm Credit System?," Successful Farming Magazine).

Investing in local businesses as a missing piece of community development: Takoma Notes local financing as an answer

When the Popularise and Fundrise real estate crowdfunding platforms were created, I argued that while it is great to offer local residents the ability to make recommendations on property development -- "the kinds of businesses you want" -- and the option to invest in local properties, the more significant need was financing for retail and service business startups.

-- Retail: what you want vs. what you can build vs. what you can create

The issue is how to make what you want happen.

Booths set up at the Takoma Park Jazz Festival.

Apparently, the Old Takoma Business Association in Takoma Park, Maryland, which runs the Main Street Takoma commercial district revitalization program that serves the commercial areas of Takoma in both Maryland and DC, has created such a vehicle, according to this press release:

Old Takoma Business Association Launches New Takoma Notes Local Investing Program - Shop Local, Eat Local now Invest Local Too!

The community known for its strong support of local businesses, will be able to invest in its businesses through a new local investing program, called Takoma Notes, created by the Old Takoma Business Association (OTBA). Through the program, local investors will be offered the opportunity to invest in local businesses, new and established, and watch their money in action in the community.

The Bristol (UK) pound local currency.  See "Barter, sharing, local currencies: formalizing the informal economy as a response to economic downturn."

Working for over a year with a group of dedicated volunteers and representatives from Colombo Bank, the Old Takoma Business Association created a program which identifies local businesses that would benefit from additional capital and develops specific loan packages to meet their needs.

Through the program, the OTBA vets the businesses then raises the money to make the loan by issuing Takoma Notes to local investors. When the OTBA raises the necessary amount within the established time period, it then lends the proceeds to the specified Takoma business. The business will pay interest and principal to OTBA which will in turn pass those payments to the Takoma Note investors. This program is offered to all Maryland and Washington, DC residents that want to support local businesses and see
their money contribute to the vibrancy of the community.

The first recipient selected for the program is one of Takoma’s newer businesses, MAD Fitness, a fitness studio in Takoma Park, MD which offers functional fitness classes and personal training. The Old Takoma Business Association will be offering $10,000 in Takoma Notes, available in increments of $100 and higher to MD and DC residents. The MAD Fitness series of Takoma Notes has a stated interest rate of 3%.

Info about how to invest in the MAD Fitness series of Takoma Notes coming soon! Open to all MD and DC residents. Sign up here to be notified of the MAD Fitness series and other future series.

SBA 504 program for startup businesses

In response to the notes about the Neighborhood Retail Summit presentation from Tuesday, about the Small Business Administration 504 loan program, Jerry Chautin, a SCORE volunteer business counselor, writes:

Please note that start up businesses can qualify for SBA 504 loans but the down payment would be 15% instead of 10%.

The U.S. Small Business Administration's 504 program was is intended to create jobs based upon a formula that has been modified several times over the years. Particular preference is given to rural, economically disadvantaged areas and minority and female applicants for which SBA may waive the job creation requirement. The loan proceeds must be used to finance long-term assets such as real estate and fixtures which makes the program ideal for construction, for expansion of manufacturing facilities and other job intensive structures.

LOAN AMOUNT

Typically $250,000 and up. Because of the complicated processing, lower loan amounts are often relegated to other loan programs and higher amounts may be too risky for most lenders. 504 loans are processed by SBA-licensed Certified Development Corporations (CDC). The CDC creates a SBA guaranteed subordinated debenture (similar to a 2nd mortgage). The debenture, up to $1.5 million ($4 million for manufacturing) is piggy-backed with a conventional first mortgage of any amount. It's usually provided by a local bank. The borrowing Small Business Concern (SBC) makes one payment to the CDC which is then proportionately paid to the bank and to the trustee for the debenture holder.

INTEREST RATE

The debenture rate is fixed at closing at a rate close to treasury securities of like term. Banks may charge a fixed or floating market rate for their conventional portion along with points and fees. The result is a blended rate to the SBC. The CDC also charges fees.

TERM

The SBA portion is usually 20 years and the conventional portion is usually 10 years.

SUITABLE BORROWERS

For-profit SBCs with a history of success in the same industry for which the funds are to be used. There are some company size and industry type exclusions.

LOAN TO COLLATERAL VALUE OR COST

Up to 90% of the cost for existing SBCs, 85% for start-ups. A classic percentage approved by SBA is where the bank's conventional loan is 50%, the debenture is 40% and the SBC provides 10% or more. An example financing of a $1,875,000 plant expansion might look like this:

· $750,000 -- SBA Subordinated debenture @ 6% fixed for 20 years.
· $937,500 -- Bank conventional loan @ 8%, 10 years adjustable every 3 years.
· $1,687,500 -- Total loan @ blended rate and term.
· $187,500 -- Minimum cash requirement from SBC
· $1,875,000 -- Total plant expansion

The 504 loan has numerous fees, requirements and restrictions. Begin by locating the CDC covering your area to discuss the specific proposal. Click here for details on the loan program.

SBA 7a Term Loan Guaranty Program
by Jerry Chautin, SCORE volunteer business counselor

The U.S. Small Business Administration's 7a program provides loan guarantees to approved banks and some other approved lenders. In the event of default by the borrowing Small Business Concern (SBC), the SBA is willing to reimburse up to 85% of the loss that the lender would otherwise sustain. Consequently, lenders may be willing to accept a greater credit risk and grant more favorable terms than they might otherwise. SBA also has a revolving line of credit loan guaranty program but very few banks are willing to participate. SBCs that are poor credit risks or fail to clearly articulate their ability to repay the loan will probably be rejected.

Loan Amount

$100,000 to $2 million. Although the SBA encourages lenders to make loans as low as $10,000, the paperwork is too extensive and the bank's set up costs too high to make small loans cost effective. However, smaller banks are often motivated to consider lower loan amounts conventionally and through SBA for existing customers with creditworthy proposals. Some large banks consider making smaller Express Loans to existing businesses with a strong history of cash flow. Two banks make Community Express Loans to under-served borrowers in the $5,000 to $50,000 range and may accept tainted credit histories and no collateral.

Suitable Borrowers

For-profit SBCs with good credit (business & owners) and a history of sufficient cash flow. Some small community banks make loans to start-up SBCs and require more cash assets, collateral and experienced ownership. SBA defines the maximum size of the business by industry and is based upon ether gross revenues or number of employees. Most SBCs qualify. A few industry types are excluded from SBA programs.

Purpose of the Loan

To expand, acquire or start a small business. Weaker proposals normally require substantial collateral, such as real estate while stronger proposals are sometimes accepted with less substantial collateral, such as fixtures and equipment.

Loan to Collateral Value or Cost

Up to 90% of cost or value is possible for well-established SBCs with quality collateral. 70-80% more typical for most start-ups. Lenders have other critical ratios related to cash flow, liquidity and assets that limit the loan amount available. Credit requirements, collateral prerequisites, cash flow minimums and loan amounts vary among SBA approved lenders. Most have requirements that are more severe than the minimum acceptable to SBA. Be sure to understand what your lender requires before you make application.

Click here for details on SBA's financing programs.