If you have been searching for a commercial real estate loan, operating credit, or expansion capital, you may have found the open water is choppy! If your sources are main stream banks, it will take a lot of effort to find the right fit. Lets examine why that is the case.
A little insight into the banks philosophy. If you are a main street bank, you are regulated heavily. When I first became a banker, the section 18 “criminal conduct codes” for banks was a two book volume which took up a corner of my bookshelf, after the Penn Square fiasco and the Savings and Loan/Resolution Trust, it became two shelves of books! More interesting, the code violations became construed as “apparent” guilt, unlike a normal crime, guilt predicated on intent, and the act, it became more like a hunting violation. If you were a hunter, and a federal game warden heard a shot after legal shooting hours, found you coming out of the marsh, from that direction, with a gun, the “apparent” guilt is you, took the shot, illegally, without any corroborating evidence. This revelation, made us old- time bankers nervous, no longer look at deal and the guy in the face, and decided to take a chance. In the “new” enlightened era, that might be criminal! Or at least result in a raking over the coals by regulators, with questions about your sanity, and ominous threats about classified loan designation, (write off, or devalued at best). As time past the old guard is gone, me included, but the regulations continued, got more extreme, to reign in these devil-may-care, banks, and reduce the effort of regulation, and make all banks a standard cookie cutter gnomes.
Lately, we see gruesome fines levied on some of the biggest banks, higher premiums for F.D.I.C. insurance. I will not suggest these were bad, or undeserved, but it gives you a glimpse of the mental state of banking. In fact most of these banks are global traders, unlikely to prop-up or start-up a main street U.S.A. business anyway, and their transgression were beyond the pale, to put it mildly. The TARP program, instituted by the U.S. Government, with the expressed intent to “shore up” with infusion of capital, from Fed funds, ( that’s you and me!), and let the banks “grow out” of their capital shortfall. This with artificial profits, at tax payers expense!
To put it directly, the bank rejected your loan, did so, while enjoying your taxpayer investment, thank you very much! Because of the atmosphere of regulatory dread, banks have resorted to the tried and true investments which also is inline with the regulators, Wall Street stocks, and bonds. If it helps banks, it helps Wall Street, it’s good for the economy. So a bank will “borrow” money from the Fed. pay.25%, (yes that’s 1/4% of 1%), invest it on Wall Street, with little regulation currently, net a spread of 3.5%- 7%. No wonder the banks got health FAST! However, there are some concerns here in this plan. It seems that the banks take in the largess of deposits, with the government assuming, ( that word again), that they would lend it out and prop up the U.S. economy… but they don’t! This NOW does concern the Government. No new jobs, no tax based expansion. With the banks aversion to making loans to new and established businesses, because banks have no incentive to do so and might have risk if they do! What can we do?
First of all scale back the easing of interest rates. This will force the banks to make loans in the economy, to provide dividends to placate their investors. We need to ease the regulatory regulations, to permit it. Allow common sense to come out to play, rather than sitting in the corner as a old, tired theory. Increase competition, with desire to earn profits restored and create new ways to restore capital to the main street economy. I believe the current administration has made such a step. The Job’s Training Act of 2012, made it easier to promote public investment opportunities and investment platforms called 506(C) section D. Expressly focused on reinvesting in the U.S. economy. It is regulated by virtue of who can participate, and the S.E.C. and the states allows it as an exempt offering Best advice is to be forward thinking and aware of the financial climate.