Lending Crisis or Not?

In preparing for a recent speech on entrepreneurship and the media, I started reading the Huffington Post. While it isn’t the first source I look to for news, it’s still a great place to see what’s going on around the world. Take a look at their current headline story written by Shahien Nasiripour on banking and small business credit. While the story is interesting, I would have liked to see a quote or two from a bank who isn't lending. As I talk to bankers, I keep hearing that government regulations are the primary thing that's keeping them from lending more to small companies.

After more than 40 summits held across the country to figure out why the nation's small businesses aren't getting the loans they need -- and qualify for -- America's central banker was no closer to a solution Monday than he was a year ago, when the Federal Reserve first identified a crippling small-business credit crunch.

With that in mind, Fed Chairman Ben Bernanke implored banks to free up credit, telling a conference in Washington that "lenders should do all they can to meet the needs of creditworthy borrowers."

The bankers aren't listening.

Bank loans to small businesses are down about $30 billion, or 4 percent, since last year, according to the latest figures from the Federal Deposit Insurance Corporation.
New loans guaranteed by the federal Small Business Administration fell off a cliff in June, dropping 66 percent to their lowest level in at least two years, according to agency data. The value of new loans in June -- $647 million -- is less than the total in February 2009, the month before the Obama administration's stimulus plan eliminated some fees on the taxpayer-backed loans and increased the federal guarantee on some of them to 90 percent, an incentive which has since expired. June's total loan figure was also less than half the total lent in September 2008, the flashpoint of the financial crisis.

The lack of credit is stifling the nation's ability to emerge from that crisis.

"Making credit accessible to sound small businesses is crucial to our economic recovery and so should be front and center among our current policy challenges," Bernanke said in prepared remarks. "Small businesses are central to creating jobs in our economy; they employ roughly one-half of all Americans and account for about 60 percent of gross job creation. Newer small businesses, those less than two years old, are especially important: Over the past 20 years, these start-up enterprises accounted for roughly one-quarter of gross job creation even though they employed less than 10 percent of the workforce."

But nearly a year after the Fed's main policy-making body, the Federal Open Market Committee, first identified the difficulties small businesses face in securing financing, the Fed appears no closer to solving the problem than they did during that two-day meeting in August of last year.

In Monday's speech, Bernanke addressed the lack of available credit, the lower demand for it, lenders' tighter underwriting standards and the frustration banks are feeling when dealing with regulators who are keen to tighten the reins after years of loose supervision.

"The insights we obtained from small business owners, lenders and others in this series of meetings have given us a more nuanced understanding of the problem and will help us identify areas where we might be able to do more," Bernanke said of the summits that began in February.

Bernanke has delivered at least seven speeches since November in which he referenced the lack of available credit, including one in each month since April.

The subject's importance cannot be overstated. Small businesses can't grow without credit, and because small businesses are the nation's primary job creators it's critically important for them to secure the financing they need, experts say. "The formation and growth of small businesses depends critically on access to credit," Bernanke said.

It's hard to understand, though, what new information the Fed has learned over the past few months that hadn't been known by experts for some time. Industry consultant Bob Coleman of Coleman Publishing said there hasn't been much in the way of new information on the credit crunch.

But Coleman said he hoped the summits have helped attract attention to the issue, and could prod Congress to pass a much-needed small business lending bill.

"We need to get this done. Businesses are dying on the vine," he said.

Some banks, sensing opportunity, have taken advantage of others' retrenchment.

Nara Bank, a $3-billion community bank founded in 1989 to serve Korean-Americans in Southern California, has increased its lending to small businesses by $250 million, or 37 percent, since last year, FDIC figures show.

"It's been a focal point for us," said Paul Choi, a bank spokesman. "A lot of the mindset here was to switch towards a more marketing-oriented mindset as opposed to a more conservative approach," Choi said. "We really wanted to push our lending volume up," he said, so the lender's district managers focused on finding good loan prospects.

More than 99 percent of the bank's loans go to businesses, according to a May investor presentation. Supermarkets are the bank's biggest borrowers of commercial and industrial loans. Hotels, motels and gas stations are among its biggest borrowers of commercial real estate loans.

"It's always been a philosophy to grow," said Choi, and the SBA's stimulus-funded efforts to increase lending provided new incentives to push in that direction. Given those incentives, the bank "made a conscious effort to really improve" its small business lending, Choi said. "We are actively and aggressively seeking qualified candidates."

Nara hopes to reduce its commercial real estate lending this year and instead focus on increasing its commercial and industrial loans.

But the nation's biggest banks continue to reduce their lending to small businesses. Coleman blames the economy for the lack of available loans, pointing to near-double-digit unemployment and the lack of demand for goods that's causing businesses and banks to hold back. Coleman also said uncertainty over new regulations -- like those businesses will face as part of the recently-enacted health care law -- has made some think twice about borrowing.
"A lot of people are saying, 'Hey, I don't know what's going on here.' I want to know how much health care is going to cost me,' for example," Coleman said.

The National Federation of Independent Business, an advocacy group, reports that its members say financing continues to be difficult to acquire, yet it's far from their biggest concern. About 92 percent of small business owners reported that "all their credit needs [were] met, or they did not want to borrow," according to the group's most recent monthly report.

What, then, caused the most angst?

Poor sales, taxes, and government red tape.

Let's Raise Kids to be Entrepreneurs

Matt Gartner sent this over to me…a really neat speech by Cameron Herold talking about Let’s Raise Kids to be Entrepreneurs. It lasts about 19 minutes, but grab a cup of coffee, settle back and listen. You’ll love it!

Women and Growing Companies

As an entrepreneur, you can never have enough resources to help you out. In the New York Times, Adriana Gardella writes a short piece, Women and Growing Companies that provides a variety of resources to help out women entrepreneurs who are interested in growing their businesses. Besides the resources listed in the article, continue down through the reader comments and you’ll find other resources of interest.

Being an entrepreneur is a very lonely journey, and getting help, contacts or support from organizations like those mentioned in the article can make the difference between success…and well, that other thing.

Is The Internet Melting Our Brains?

I was all set to blog today about the article in Wired magazine dealing with the internet and how it affects how we think. The article from the new book, The Shallows: What the Internet is Doing to Our Brains by Nicholas Carr, and it is a very interesting look at how the internet impacts the move from short term to long term memory. But because the magazine’s website has such a clunky search function, after a few minutes of trying and being unable to find the article, I gave up. Now perhaps that is the exact point the article was making…that the web has caused us to be scanners rather than readers, which impacts our ability to truly learn. Maybe you’ll be better at it than me, or perhaps you’ll just help the media industry out and buy the magazine and the book, but the question I am left with is how could a magazine that deals with the brave new world of innovation have such a clunky search function.

Entrepreneurs Can Change the World

Last week we had the chance to celebrate both Canada Day on July 1 and Independence Day on the 4th of July, so it was a relaxing and fun week. Now that it’s time to get back to work, and for those of us who are entrepreneurs, it’s a good time to get juiced up again on what we do…and what better way to do it than with the Grasshopper video: Entrepreneurs Can Change the World.

I love the Grasshopper video and I use it in almost all of my speeches on entrepreneurship. It’s such a great piece that I also like to plug the company(no, I'm not getting paid to do so), which according to their website is “a virtual phone system for entrepreneurs.” And since they’ve been good enough to keep this video around on the web, take a look at what they can do for your business and then click and watch the video again. In fact, keep it handy, because whenever you need a little shot-in-the-arm to give you the energy to keep doing what you do to grow your business, watch the video and you’ll be ready to get back to work.

Foursquare Lands $20 Million Series B Round

Last week at the MOB Conference in New York city, I met with Syracuse University grad Dennis Crowley of Foursquare. Unless you’ve been living under a rock the last three months, you have most certainly seen Dennis’s picture in a business magazine or publication. Foursquare, which really had its coming-out party at SXSW, is a fascinating company which was birthed by Crowley and his team, who also was responsible for Dodgeball, which was purchased by Google.

Here is something his most recent blog post:

Hey all - It’s been quite the year for foursquare. Last year at this time, Naveen and I - tired of working around my kitchen table - borrowed a desk from our friends at Curbed.com and Hard Candy Shell. Two months later we brought on our first hire (Harry!) and a few weeks after closed on our first round of financing: $1.35m from Union Square Ventures, O’Reilly AlphaTech Ventures and a handful of angels. Back then, our office looked like this.Fast forward a year: We’re now 27 people strong. We can’t fit any more desks or chairs in our office so we’re borrowing cubes from our neighbors downstairs. We’re about to hit 1.8 million users and we’re seeing Super Swarms happen all over the world (Indonesia, you crazy!). In short, it’s been an amazing year for foursquare. A huge thank you to anyone that’s ever unlocked a Newbie badge!And with that, we’re excited to announce that we’ve raised another round of capital. Today we closed on a $20m Series B round with Union Square Ventures, O’Reilly AlphaTech Ventures and our newest partner, Andreessen Horowitz. We’re thrilled to have the continued support of our original investors and additional support and expertise from the team at Andreessen Horowitz. The two big names behind Andreessen Horowitz - Marc Andreessen and Ben Horowitz - are each legends in Silicon Valley. They know better than anyone how to transform startups into successful organizations. As we continue to rapidly expand to take advantage of the opportunities in front of us, Ben and Marc’s expertise in growing companies will be invaluable. With this new round of financing, our main priority will be to expand our organization to supplement the amazing core team we’ve assembled already (know any great engineers? send them our way!). We’re hoping to build a world-class engineering organization, based primarily in our headquarters in the New York City to help us develop the next generation of mobile + social + local products that will excite our users and provide unique value for local merchants. The new investment capital will also help fund the infrastructure needed to house our team (we’re finally getting a new office!) and support our growing audience of nearly 2m users.It’s been a crazy year for us and we’re expecting the next 12 months to be even more of an adventure. Look forward to more great product from us soon… we’re really just getting started.- @dens and the rest of team foursquar

Congratulations to Dennis and the rest of the team!

Restarting America's Innovation Engine

Thanks to Amy Schmitz for passing on this interesting article, How to Restart America’s Innovation Engine, from Daily Finance.

William Sahlman a professor at Harvard is interviewed on entrepreneurship and capital in the article by Peter Cohan. While Sahlman is one of the guru’s of entrepreneurship education, I’m not sure I would agree with him that most talented management teams have no trouble getting capital. I've seen too many great teams with outstanding ideas go no where with VC's because they weren't in that particular hot space.

However, I do agree with him that VC’s provide a very important source of capital to the entrepreneurial marketplace, and that they “spearhead innovation” throughout the economy. I also enjoyed the praises that Professor Sahlman heaped on the angel investors, one of the least recognized and yet most important pieces of the financing continuum for entrepreneurs.