Tues March 04, 2008
If there is anything positive coming out of the subprime disaster, it is that everyday people have gained insight into a struggle faced by many small businesses — access to credit. Just ask Krysta Clark.
Clark is launching her own business in March, Edible Arrangements, specializing in fresh fruit gifts with a florists' flair. When looking for financing, she encountered shifting terms, fees and delays that threatened to end her dream of opening her own business. Given that she planned on hiring people and building out her store, the ripple effect of her troubles was clear. The brakes were slammed on her dream of running her own business.
Access to credit is critical to small businesses. It makes or breaks small business, and the credit crunch, which was felt as late as last summer, can create a drag on the economy like brakes slammed on a dozen cars can cause a traffic gridlock. No one is going anywhere if the brakes are on small business.
Consider the problem. In late January, Steven Preston, head of the Small Business Administration, said that loan volume for SBA's signature loan program has decreased, with originations dropping to 20,000 in the fourth quarter. In fact, the SBA has lost 368 financial institutions the past two years--a 7 percent decline, Preston said.
The Wall Street Journal pointed out a similar problem on January 22. Credit is drying up for small business, according to the Journal, and rate cuts are not likely to have much of an effect. Banks have toughened credit standards in the wake of the subprime meltdown.
It's difficult to overstate the drag this can have on the economy. Small business is a significant engine for the U.S. economy. According to the SBA, nearly half of Americans working in the private sector work for small businesses. Sixty to 80 percent of the net new jobs generated over the last decade have been in small businesses.
There is one solution that doesn't involve a single dollar of tax money or rebates: credit unions. For years, these not-for-profit financial organizations have launched the dreams of their member-owners. From opening restaurants to starting lawn care businesses, credit unions for over 70 years have been providing members with these types of loans. Many of the business loans a credit union provides are for members who were turned away from banks, generally because their loan requests are too modest or they don't have the level of experience and existing capital.
The difference is credit unions know their members — in fact they're owned by them. The member owned credit union industry as a whole has very modest default rates in its entire portfolio (under 2 percent) and credit unions are often familiar with a member's entire financial picture, not just their credit report. When credit unions step in and offer member business loans, the results speak to just how great the demand is for credit for small business. In 2007, Randolph Brooks Federal Credit Union became not only the top Texas credit union in terms of loan production for the Small Business Administration's credit union program, it also became the third in the United States. Unfortunately, the ability for credit unions to step in at such a rate and help at this critical time has a set of legislative brakes.
Ten years ago, in a move to restrict the growth of member business loans at credit unions, business loans were artificially capped by Congress at 12.25 percent of a credit union's assets. For seventy years prior, there was no cap and several credit unions built healthy, reasonable business loans for members.
If Congress wants to really stimulate the economy, they can lift the business lending cap set at 12.25 percent and get the brakes off of small business lending. This move alone would put an estimated $5.7 billion of additional, reasonably priced credit in the mix for small business.
Fortunately for Clark, her credit union — Security Service Federal Credit Union in San Antonio — was able to come through. Edible Arrangements will open in March and thanks to her reasonably priced credit from her credit union, she is motoring on her way to a great business venture.
Giving money to consumers in a stimulus package is one step. But to really get the motor of our economy going, Congress should step in now and marshal the power of credit unions to grow small business in America — especially when other lenders have put the brakes on the engine of small businesses.
Source: http://www.mysanantonio.com/opinion/stories/MYSA022908.O.
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