If some of the erstwhile Defenders of Small Business were truly, deeply, and sincerely concerned about the issues faced by small family owned commercial enterprises — some of the following questions might be under discussion.
#1. Small businesses need financing. The cash flow of any small business is calculated by finding the difference between the income and the expenses. If the difference is positive, the company is making a profit. Negative numbers indicate a company with problems. Most small operations are subject to the overall commercial cycles; but for well managed companies will obviously be in positive territory. However, the oldest rule in the books still applies: It takes money to make money. Funds for sales promotion, for business expansion, or for restructuring the firm which can’t be self-funded have to be borrowed. The trends in small business lending have been disturbing for some time now:
As the graph from FDIC data indicates, banks have been making fewer small business loans since the mid 1990’s. In 1995 banks issued loans at a rate of 52%, which declined to 29% as of 2012. Why?
Securitization and Speculation are two elements, as explained by Small Business Trends:
“…banks have dramatically increased their securitization of loans – packaging of loans into bonds that can be sold to third parties. Small business loans are not easily securitized because the terms of the loans are heterogeneous and different banks have different underwriting standards. As a result, the desire to securitize might have led banks to reduce their small business lending relative to loans that are easier to package into securities.”
Many pixels have given their all on this blog to the shift on the part of major lenders into securitized loans and the speculation thereon. As long as there is more money to be made by packaging student loans, mortgages, credit card debt, and auto loans into securitized products, and yet more money to be made by packing, slicing, dicing, and dividing these up into tranches… then major lenders will have far more incentive to play in their markets than they have to make loans to Mom and Pop operations seeking to expand their firms.
Bank consolidation means more than Too Big To Fail, it can also mean Too Big To Pay Attention. Smaller local banks are more likely to make loans to smaller local companies. The problem these days is to find a small local bank. There’s a chart for that trend too:
As the study reported in December 2011:
“The number of U.S. commercial banks and savings institutions declined by 12 percent between December 31, 2006, and December 31, 2010, continuing a consolidation trend begun in the mid- 1980s. Banking industry consolidation has been marked by sharply higher shares of deposits held by the largest banks—the 10 largest banks now hold nearly 50 percent of total U.S. deposits.”
We can be even more specific about lending institutions if we look to the December 2012 report from the FDIC: (pdf)
“Consolidation in the U.S. banking industry is a multi-decade trend that reduced the number of federally insured banks from 17,901 in 1984 to 7,357 in 2011. Over this period, the number of banks with assets less than $25 million declined by 96 percent. The decline in the number of banks with assets less than $100 million was large enough to account for all of the net decline in total banking charters over this period. Meanwhile, the largest banks—those with assets greater than $10 billion—grew elevenfold in size over this period, raising their share of industry assets from 27 percent in 1984 to 80 percent in 2011.”
Thus we have two problems — fewer banks and more large banks controlling more of the money which might be lent to small business owners. Too big to fail becomes not only Too Big To Fail and Too Big To Nail, but also too big to be all that interested in making small business loans as well. Larger banks have couched parts of their opposition to provisions of the Dodd-Frank financial reform act in terms of “protecting community banks,” but that obscures the obvious — that the Big Banks control more of the money available for the kinds of loans community bankers could be lending.
The lovely vision of the Local Community Banker functioning in West Deer Breath rural America is something out of a Grant Wood painting, but also something with basic issues unrelated to the interests of the Big Banks.
Community Banks more often depend on traditional lending and savings practices, and this is problematic for their bottom lines:
“One element of the performance gap has been a narrowing of the traditional advantage that community banks have had in generating net interest income in recent years as the net interest margin (the spread between asset yields and funding costs) has narrowed. Because of their focus on traditional lending and deposit gathering, community banks derive 80 percent of their revenue from net interest income compared with about two-thirds at noncommunity banks. Accordingly, the narrowing of net interest margins places a significant drag on the earnings of community banks.” [FDIC pdf]
While the Big Banks can generate revenues from non-traditional activities, the community banks are more reliant on depositors and local loan holders for their revenues; this means that it is more difficult for the community banks to pass along the benefits of lower interest rates to their customers. Thus, while the Big Banks sob crocodile tears over the pressures on smaller community banks created by financial regulation, their own consolidation and income generating activities are vacuuming up the money necessary for small banks to lend…to small local firms. We can put this in Banker-Speak:
“Another factor contributing to the earnings gap between community and noncommunity banks has been the ability of noncommunity banks to generate noninterest income from a wider variety of sources. These include trading, venture capital and investment banking activities that are not typically part of the community banking model. Noninterest income averaged 2.05 percent of assets at noncommunity banks over the study period compared with only 0.8 percent at community banks.” [FDIC pdf]
Perhaps it’s not too much to ask those Champions of Small Business, to question the merger and acquisition activities of the Big Banks, and to regulate the activities (venture capital and investment banking) which are not usually the province of smaller community banks?
#2. Small Businesses depend on local infrastructure. The category of infrastructure relates to the nature of the business, but there are some universals.
Security: Most truly small businesses do not hire their own security firms. Though they may install security cameras and burglar alarms, they are ultimately dependent on local law enforcement to secure their property and inventory. Cuts in patrols, layoffs of personnel, or other reductions which increase response times have a more immediate effect on small family owned businesses than on larger corporate firms.
Communications: There is no functional marketing plan unless the business owner can communicate with prospective customers and clients. As more of these prospective customers rely on Internet based information, the local business without a web-site is functioning at a distinct disadvantage. The availability (or lack thereof) of broadband access is critical. At this point the community banking and the communications problems merge. Most community banks operate in non-metro areas, and the biggest gap in broadband access is in — non-metro (often rural) areas. The Hudson Institution looked at the problem in December 2012:
“…our nation faces a “broadband gap,” not only with regard to the lack of access in rural areas to service that meets the broadband threshold, but also with regard to the lack of availability of faster service between urban and rural America.” [Hudson pdf]
Specifically referring to business needs, the report states:
For businesses and institutions, broadband makes possible real-time interaction with customers and suppliers. “E-commerce” is heavily circumscribed in areas without broadband. “E-services,” such as education and health care, which come with expectations of using data-intense graphic and video content, cannot be delivered without broadband. [Hudson pdf]
Education and health care aren’t the only realms in which the lack of broadband access is a problem in rural areas. Not only are rural residents unable to participate in e-commerce efficiently, but rural business owners lack the capacity to fully develop components of e-commerce as well. As of 2010 approximately 40% of the U.S. population (both urban and rural) had no broadband access. [CNET] While the ARRA provided some funding for improving the situation, there is no guarantee further appropriations will be available, and there are already attacks on broadband access at the state level from the major tele-com corporations. [NC Think Progress]
Physical Infrastructure: As the following chart from the Bureau of Transportation Statistics indicates, most American commerce moves by truck.
It would stand to reason that that which improves transportation will be of value to all businesses, and small businesses in particular. Since trucks need highways it would seem that attention to our highways and roads would be in order.
A report from the McClatchy publishers this past month is not encouraging.
“Five years after an interstate highway bridge collapsed in Minnesota, killing 13 people and injuring 145, the country still has a bridge repair backlog of $65 billion, according to the Federal Highway Administration.
At a time when Congress is proposing significant budget cuts and tax increases have little support, states are canceling or scaling back highway projects. They’re looking for private partners to help finance construction, and still coming up short. Motorists are discovering that the roads they thought were free are anything but.”
We have a situation in which the gasoline tax isn’t covering the cost of construction and maintenance, the oldest part of our vaunted Interstate Highway system is reaching the end of its “life cycle,” and states have been all to eager to make political decisions as opposed to structural decisions concerning the application of highway funds. Those with an perverse sense of adventure might want to traverse the 17 bridges which have been declared the worst in the country. [Business Insider] They are the most visible examples of the inadequacy of pursuing these policies.
For those who are specifically interested in the bridges over which our commerce is conducted, the Transportation for America (pdf) report is illuminating. While only 2.2% of Nevada’s bridges are considered structurally deficient, this happy statistic obscures the fact that bridges are essential in the process of getting goods to Nevada. The following chart from the TA report is disturbing:
Those not concerned about the “annual daily traffic” over “structurally deficient bridges” must be those who have never considered purchasing any form of insurance. Yet, materials, supplies, and finished goods needed by American small businesses must traverse some of these “structurally deficient” bridges.
What Do American Small Businesses Really Need?
For all the high-flying rhetoric about “freedom,” and “free enterprise,” and the equally vague touting of “freedom from government interference,” small businesses need INCOME. In order to find financing for the operation or expansion of their businesses they need banks interested in and sympathetic to their financial needs. All the “freedom” rhetoric on this planet won’t replace the necessity of controlling the urge of the Big Banks to consolidate and place less and less resources within reach of truly small companies.
We can wave the banner of “Free Markets,” but it must be done in an environment in which small businesses, especially those in non-metropolitan areas, can communicate with their prospective customers and clients.
We can shout the virtues of “Freedom” from the roof tops, but we can’t ignore the fact that commerce requires transportation infrastructure, in order to keep the lifelines of commerce open and efficient there are roads to be built and maintained, and bridges which require our attention.
What we can’t do is to ignore the absolute necessity of financing, communication, and infrastructure in the operation of a functional economy. In other words: Austerity cannot create Prosperity.