Remember back in October we were wondering how’d it get so bad so fast? We had the category killer event - subprime loans, which kicked off the downturn of our financial system. Then the trifecta hit - a recession, a credit crunch, and now massive layoffs.
Hard to stay focused, isn’t it? If you’re an employee somewhere, you’re wondering if the layoffs will impact you personally. If you’re a small business owner, you’re wondering how much of a decline you can handle in cash flow. And everyone wants to know: will my bank survive? And what does the economic stimulus package mean to me?
This article is an update of what has happened since last October and how it affects you. From October forward, the Treasury has been doling out cash like lollipops, courtesy of TARP – Troubled Asset Repair Program.
Now, right off the bat, we already have a problem. Like the ‘bailout’, TARP is mis-named. It does not repair any assets. After the legislation was passed, the method of disbursement was modified. Instead of buying up the bad loans, which would take too long, a capital purchase program was created. The top 9 financial institutions in the US were ‘encouraged’ to sign up for a forced injection of cash that amounted to $125 billion; $57 billion then went to Super-Regional Banks like KeyBank in Ohio and Regionals like Sterling here in WA. The community banks, of which there are about 8,000, were left to mop up the rest. In total about $194 billion has been doled out to date to about 300 banks, with more to come.
It is very important for all of us to understand the terms of this agreement. In exchange for cash, each of these institutions agrees to pay a 5% dividend per year for the first 5 years, and 9% thereafter.
Why is this important? Because there’s a lot of hype right now about all this money going into bank vaults and not lending it to small businesses to relieve the credit crunch. Let’s debunk the myth. Mullah is a bank’s inventory, right? If they pay 5% for their inventory, they have to lend it out at more than 5% to make some dough.
For example, Washington Federal got $303 million in TARP cash and it’ll cost them 5% per year, or roughly $15 million. In order to make any money they have to lend the cash out for more than 5% per year, right? Who are they going to lend it to and how much? Someone – a small business - will have to pay in excess of 8 or 9% on loans just for the bank to cover their overhead. So now we’re talking 10% or higher if the bank gets to make a profit…see how a credit crunch happens? There’s cash out there, but who can afford it?
To make matters worse, there’s still the nasty little capital reserves that each bank has to maintain. Remember that’s that certain percentage of every dollar lent that has to be tucked away in the vault just in case. It’s sometimes referred to as Tier 1 capital. The TARP money qualifies as Tier 1 capital, so regardless of the gruesome interest rate or the restrictions on executive compensation that come along with the TARP money, banks are gobbling the stuff up so they can shore up their capital reserves.
And that’s how we got here. What can you do?
It’s time to take personal inventory.
If you’re a small business owner, or if situations are such that you are considering becoming a small business owner, you have some options regarding financing. While most reports of SBA loans do show a drastic decline in the last three months, almost 60%, in the 7(a) loans guaranteed by the government, there are still some banks doing a volume business. Banks that operate in our area with a commitment to SBA include USBank, Bank of America, Wells Fargo, and KeyBank. Local community banks with a somewhat active presence in these loans include Heritage, Sterling, and a few others. Go here for SBA lenders in WA State. You’ll be able to see who is a preferred lender and get contact information.
If you have an unsecured line of credit, and you have borrowed against it in the last 6 months, and your credit rating dipped to GOOD from EXCELLENT, don’t be surprised if Amex et al. drops your total line down to the amount you’ve borrowed, cancelling the excess. They need liquidity, and they don’t want to be lending to you if they think you’re beginning to feel the pinch.
This means you have to have a back-up plan. Contact your accountant, get financial statements created, demonstrate that you are a for-profit entity, that your cash flow can support a loan of $75,000. You’ll be charged 6% for a 7 year repayment, plus approx. $1,870 in servicing fees annually.
Okay, this next part is for everyone, whether a small business owner or not. You are the CEO of your own personal life and I’m going to share with you something that is essential. No matter what happens, whether you keep or lose your job, whether you close your business or sweat it out and keep your doors open, whether your house is under-valued, or your investments have lost 40%, you are still a hero in your own life. There is a child, a man or woman, a furry friend that doesn’t care what title you have, or how much is in your bank account. They need you, and they love you. So do whatever you can to find a paycheck and make it work even if it means taking a job that is beneath your qualifications.
A lot of my clients right now can’t believe they are in this terrible situation. Drop the ego. Lose the denial. Get over yourself. Move on. All of our lives have been impacted, the ones who will survive are the ones who can adapt. So get busy.
How? Clean up your credit. But, Kel, you say, my credit is good. No, get on line and download your score and details from www.annualcreditreport.com. It is free once a year from each of the three reporting agencies. And you will be amazed at the number of credit cards you have accumulated since college. Gap, JCREW, Banana Republic, Sears, Neiman Marcus, Marshall Fields, unbelievable. You don’t need these cards, they have huge interest rates, and they require companies/banks to keep liquidity available in case you decide to use them. Cancel them and help the US liquidity system.
If you are having difficulty paying your mortgage and you can demonstrate the ability to pay once a reduced rate is applied, your mortgage institution may give you a ‘spot reduction.’ Meaning, on the spot, with the necessary documentation, some of the mortgage finance companies are realizing that it is much better to keep someone in their house and paying, than force them into default and foreclosure. Washington Federal for instance has set up a full Mortgage Service Center, for just this purpose, where they are regularly reviewing these rate decreases. Other banks are following – so call them and ask.
There is an old bank joke that goes: default on a $1 million, and it’s your problem; default on $100 million and it’s everyone’s problem.
This is everyone’s problem. With education and with sound business/personal judgment, we’ll get through it.
(If anyone knows of other banks offering spot reductions, I’d love to hear about it to pass it along to readers.)