Making Borrowers Healthier, As Well As Banks

One reason the credit crisis persists for small businesses is that even as banks have tightened their lending standards, fewer small businesses are considered creditworthy. Many have seen sales drop, cash-flow slow down, and the value of their assets plummet. So even though banks may be healthy enough to lend, businesses aren’t necessarily healthy enough to borrow.

In this week’s magazine I wrote about a new program to address that problem for small manufacturers in Michigan. The program makes borrowers more creditworthy by putting up additional collateral in the form of cash deposited into the lending institution. That makes up for the often steep declines that manufacturers have suffered in the value of the assets they have as collateral, including real estate, machinery, receivables, and inventory. None of this is worth what it was two years ago, especially in Michigan. From the piece:

A company that had collateral valued at $6 million three years ago could now see those same assets appraised for $2 million, says Ed Mounce, commercial services manager at OMNI Community Credit Union in Battle Creek, Mich., because of the glut of real estate and equipment.

To buy the robots, steel, and presses it needs to diversify, Wolverine [Metal Stamping] had lined up a $2.5 million loan from GE Capital (GE) as of September 2008. While a spokesperson says GE doesn’t comment on individual credit decisions, Wolverine’s chief financial officer, Bruce Weber, says GE backed out the day after Lehman Brothers collapsed. For over a year, he says, “we’ve been trying to get the exact same financing done”—but during that time Wolverine’s machinery had depreciated by 20%. Meanwhile, the company booked $10 million in new business with such appliance makers as Whirlpool (WHR).

The collateral problem is compounded for businesses that had credit lines cut or reduced in the crisis more than a year ago and have been spending their cash since. For all the talk from Washington about boosting small business lending, no policy response has actually addressed the problem that small businesses—often through no fault of their own—are bigger credit risks than they were a year or two ago. (Expanded SBA loan guarantees help, but they’re really backstops — banks don’t want to lend on the expectation that they’ll have to collect a guarantee.)

You can read more about the program in Congressional testimony from Ned Staebler, who coordinates the program for the Michigan Economic Development Corp. It may not be a cure all, but it’s a new approach to a problem that more than a year after the crisis began policy makers still have not adequately addressed.