[Vision2020] Mr. Banker, Can You Spare a Dime?

[Art Deco]

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September 9, 2011
Mr. Banker, Can You Spare a Dime?
By JOE NOCERA
Not long ago, I received an e-mail from David Rynecki, an old friend and former colleague who left journalism a half-dozen years ago to become a small businessman. David's firm, Blue Heron Research Partners, does research for investment professionals; he was writing to share his frustration in trying to build a business in the aftermath of the recession. 

"Like many small businesses," he wrote, "we were socked by the recession. Rather than cut back, however, we chose to be aggressive." He and his wife, Marcia, invested everything they had in the firm. They refused to lay off their three employees. During an especially bad stretch, they used their credit cards to stay afloat. 

Their risk-taking paid off. "We're hiring again," David's note continued. (Indeed, he's now got a full-time staff of nine.) "Business is strong. Our receivables are unbelievable. We have long-term contracts with established investors." 

His problem was - and is - the same one facing millions of small businesspeople.  With lending standards extraordinarily tight in the wake of the financial crisis, banks simply aren't making small business loans, not even to perfectly creditworthy people like David.  Which means he can't expand - and hire - the way he would like to.  Yes, he said, he could continue to plow his cash flow into the business and grow it slowly.  But to get the firm to the next plateau, he needs a bank loan. 

"Banks say they have credit to offer," he wrote. "And they make you go through all the motions. But then they offer nothing." He tried three times to wrest a paltry $50,000 from two different banks, including JPMorgan Chase, which the firm uses for its own banking needs. He showed the loan officers Blue Heron's receivables and its long-term contracts. It didn't matter. He was turned down all three times. No collateral, said JPMorgan. Lack of a relationship, said the other bank. 

As it happens, around the same time I was hearing from David, a small businessman on the West Coast was sending me very similar e-mails. His name is Bill Schultheis, and he was trying to help his wife start an upscale spa in Bellevue, Wash. He and his wife, Zhiqin Zhang, were looking for $500,000. 

"My wife moved here from China 13 years ago," Bill wrote. She had already built and sold two spas; now she wanted to create something bigger and more luxurious. If all went according to plan, wrote Bill, she would employ between 25 and 35 people - "something Obama would appreciate," he added with a touch of sarcasm. 

Bill sent me the business plan for the new spa. It was impressive. He outlined Zhiqin's track record. He explained that the cash flow from his day job - he's an investment manager - could pay off the loan within 18 months. And then he sent me a chronology of his failed efforts, going back to April 2010, to land a loan that would allow Zhiqin to follow her entrepreneurial dream. 

Wells Fargo. Cathay Bank. KeyBank. Columbia Bank. In all, 14 banks turned down Bill and his wife. Lack of collateral was invariably the reason. "Banks tell us to get lost when we come knocking on the door, even though we are putting up 60 percent on a $1.3 million project, which is halfway complete," Bill wrote in early August. 

 A few weeks later, however, Bill sent me another, very different e-mail: Bill and Zhiqin were going to get their loan after all. A local institution, Sterling Savings Bank, based in Spokane, Wash., had said yes - much to their amazement and delight. 

Why had Sterling been willing to overlook the lack of collateral, which had a been a deal-breaker for every other institution? Because, as one of its executives, Robert Weisel, explained to me, making sensible loans to small businesspeople was how Sterling competed for business - even when the loan applicants didn't meet "the traditional standard," as he put it. 

"We are linked to our region and our community," he said. 'We try to distinguish ourselves by trying to figure out how to make transactions work, even if it means being willing to think outside the box." In this case, Bill's cash flow and Zhiqin's track record more than made up for the lack of collateral. 

On Thursday night, President Obama offered up a series of tax breaks to small businesses as part of his jobs package. "Everyone here knows that small businesses are where most new jobs begin," he told Congress. I don't mean to diminish the tax relief, which may, indeed, encourage small businesses to start hiring. But, far more than tax relief, small businesses need credit. That is what the president should be pushing for. 

Three years ago, the federal government used tens of billions in taxpayer dollars to save the banking system. Now, at this dire economic moment, the country needs the banks to return the favor. Pushing the country's banks to act more like Sterling Savings Bank, and less like JPMorgan Chase, is something that the president might want to put on his jobs agenda. 




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Wayne A. Fox
wayne.a.fox at gmail.com
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