•
Small business owners have a large burden on their shoulders right now. Many states are looking to their small businesses to provide the boost needed to get the economy moving again. With the astounding pace of corporate restructuring and taxpayers leery of more bailout plans, Congress is working on new incentives and loan packages for small businesses.
In the yet-to-be-released stimulus package, the House version of the bill would inject $430 million into the Small Business Administration loan program. In addition, the measure will give the SBA the ability to make loans directly to business owners. This provision side-steps private lenders, who reduced their lending volumes by more than half between the fiscal 2008 and 2009 years.
The bill doesn’t cut out private lenders altogether. Instead, it increases the government-guaranteed portion of SBA 7(a) loans from 85% to 95%. The SBA’s role in lending looks much like that of the “lender of last resort.” Under the current plan, the agency will take in loan applications from small business owners and forward them to private lenders within a 100-mile radius of the applicant. If no private lenders come forward, the SBA will work directly with the applicant to provide access to capital. Under these circumstances, the SBA would also service the loan.
In another boost for private lenders, the SBA will make loans to secondary-market brokers and dealers who buy and sell small business loans. The secondary loan market is essential for primary lenders, who use the market as a way to refresh lending capital.
Although the issue hasn’t yet been addressed in the proposed legislation, President Obama has said that he favors approaches that reduce the fees associated with SBA lending. High fees and other costs have discouraged many private lenders. With private lenders unwilling to take on more risk in lending, the low returns on SBA loans has made participation in the program impractical for many lenders.
Bookmark it
•
In January of this past year (2008), there was a report at Research Central and CIO Insight online stating that 186 different financial institutions (credit unions included) had been victimized by online fraud. Additionally, attacks on online credit unions had accounted for 45% of all monthly activity during 2007. Conversely, attacks against national banks had decreased by nearly 44% during the same time frame. Speculation has arisen that with a weakened economy that the credit unions are now easy targets for hackers and scam artists.
The above reports appeared to be just the tip of the iceberg for the problems that the nation’s credit unions have been experiencing throughout 2008, or possibly a harbinger of worse issues to come. It became obvious that the financial sector in the US was infected by the evidences of numerous credit losses and write-downs. Back in August, a report was released by the Wall Street Journal that five of the biggest credit unions in the US have lost considerably on mortgage-backed securities in the residential real estate sector. Entire equity bases were literally wiped out in the process.
This indicates that this housing market distress has been spreading even into the financial sectors were there is less risk involved. Gerald Hanweck, who is a finance professor at George Mason University and is a visiting scholar at the FDIC, has studied the banking industry for quite some time now and feels that the situation has been growing more serious throughout 2008.
In addition to the above, the federal regulator who oversees the US credit unions claims that the losses will most likely reverse themselves once the mortgage markets become more stable, and once these institutions become more adequately capitalized. However, there are some outside observers who are very concerned that these credit unions have underestimated how deeply the problem is running within the mortgage industry.
According to Hanweck, this is a very serious situation and it isn’t getting any better. Hanweck believes that the five credit unions have sufficient funding available to handle a deeper downturn in the situation, but he continually worries that added risk could lead to a more serious run on funds with one or all of them. Since 1990, the total assets of US credit unions have been consistently increasing from just over $200 billion to just under $800 billion as of the end of the second quarter of 2008.
Credit unions are member-owned, not-for-profit cooperatives (organizations) that lend money and take deposits like regular banks. The credit unions have become key players in the mortgage industry, and their problems are focused on the so-called “corporate” credit unions. Unlike the standard credit unions, the corporate entities do not deal directly with the consumer. However, they do provide financing and investment services to the regular credit unions who do deal directly with consumers.
According to several federal regulatory filings, the five corporate credit unions that are showing the largest mortgage-related losses are:
Constitution Corporate Federal Credit Union
Members United Corporate Federal Credit Union
Southwest Corporate Federal Credit Union
U.S. Central Federal Credit Union
Western Corporate Federal Credit Union
As of the end of May, 2008 they had reported nearly $5.7 billion in “unrealized” losses which occur when the current market value of any security drops, whether it has been sold or not.
The fact that these credit unions are experiencing grave financial strain, even though they are the most conservatively operated institutions in the financial sector, indicates that no financial sector is immune from this mortgage meltdown malady. It has also caused far-reaching damage throughout the commercial bank sector and the Wall Street financial services. Mark-downs of over $300 billion in connection with the mortgage industry dilemma have already taken place as well.
As a result of regular credit unions being too small to engage in more sophisticated investing, the corporate credit union came into being for the purpose of serving these smaller entities. A portion of the assets/funds of these regular credit unions gets placed with one of the corporate ones who in turn will invest the money. Assets of the 28 corporate credit unions (which are owned by the member credit unions) total roughly $90 billion. US Central provides the member credit unions with investment services in addition to being a service provider for the corporate ones.
Credit unions, like banks, are insured by the Federal Government for up to $100,000 per account and up to $250,000 for retirement type accounts. Seven of these regular credit unions failed in 2007, and as of August (2008), nine have failed so far. Since these regular credit unions have funds deposited with the corporate ones, a financial failure at that level would equate to losses for the regular credit unions involved, as well as losses for the depositors/members of them. Additionally, it has been 13 years since a corporate credit union has failed, but eventually, the regular credit unions involved with them did recover their funds.
From a historical standpoint, 25 years ago in 1983, Congress passed legislation to increase the United States’ contribution amount to the International Monetary Fund. There was also a conference of 13,000 government financial officials and international bankers that was held in Washington, D.C. during Reagan’s Presidency. It was the joint annual meeting of the IMF and World Bank wherein they addressed problems with the US dollar and interest rates. Of equal importance, these issues shared the stage with concerns over the deadlock of IMF funds.
As of early December, 2008 a two-tiered plan to help those institutions battered by investments in the lending and mortgage sectors has been introduced by the federal agency that oversees the operations of US credit unions. As of this coming January, 2009 the NCUA (National Credit Union Administration) will be awarded a $41.5 billion “shot in the arm” that was approved by Congress in September (2008) to stimulate some liquidity for corporate credit unions that are experiencing continually mounting losses on securities tied to mortgages and other types of home lending.
Additionally, this plan also provides another $2 billion for retail credit unions so they can cut their interest rates on mortgages that are currently held by homeowners who are struggling to make their payments on time. In addition to this, the funding has been structured in the form of repayable loans. No matter what the future holds, or what happens with the long-term viability of these troubled corporate credit unions, the NCUA is counting on the retail credit unions having a serious interest in (and committed to) preserving the entire credit union sector through these difficult financial times.
Bookmark it
•
In today’s difficult small business climate an issue facing many business owners is the threat of losing their business or having the bank foreclose. When sales continue to decline month after month with no sign of a turn around, and your vendors and trades keep getting pushed out further it is an ominous and scary feeling for the small business owner. You have worked your whole life to build your business and provide a better life for you and your family.
Flickr Image by: cbonney
Don’t let the current business climate get the best of you. be strong mentally and stay calm. If you owe money to your bank try and be upfront with them and work out a “forbearance” agreement where they will take a reduced payment until things rebound. It is a last resort for a bank to want to liquidate especially it today’s environment.
“Also consider other ways to raise the money you owe the bank. Now certainly isn’t an ideal time to borrow money since banks’ lending standards are tight. But in better times you might have found another lender willing to lend you the money to pay off the delinquent loan. Consider using personal money to pay down part or some of the debt, borrowing from friends or family or even finding other people willing to lend you money or invest in your business. “…read full article
Other options to consider when faced with pressure from your bank, vendors, and back taxes are a merchant cash advance program. A merchant cash advance or business cash advance allows a business owner to get upfront cash for their future credit card sales. This can be an ideal solution to more traditional means of obtaining financing that is not currently available. A merchant cash advance providers gets paid back out of a small percentage of the daily credit card sales so the business owner doesn’t get his/her cash flow sqeezed.
It is important to remain calm in tough times and review and understand all your options. This is they key to success in navigating though the rocky waters of todays economy.
Bookmark it