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As the domino effect of the mortgage meltdown morphed into a securities tsunami, unsuspecting borrowing and investing customers were swept into confusion. After enduring the arduous process of securing a loan to expand his business, a friend of mine was in the process of closing on funding until the loan officer from the major bank, where he’s been a customer for a decade, called to tell him they would have to “put his loan on hold.” She didn’t know when, or if, they’d be able to complete the transaction.
When 158-year old investment bank, Lehman Brothers, filed for bankruptcy in tandem with the announcement that 94-year old brokerage firm, Merrill Lynch, was being acquired by Bank of America to protect it from a similar fate shockwaves reverberated around the globe. To complete a 48-hour financial failure trifecta, 99-year old American Investment Group (AIG), the world’s premier insurance provider, ran out of cash although it remains a solvent and profitable company. Simultaneously, an estimated $186 billion was pulled out of U.S. money market mutual funds causing a liquidity (cash) constriction among numerous banks.
When banks face a cash shortage, they stop lending — to each other, to consumers, and to businesses. On any business day, billions of dollars are lent overnight between banks. As money market mutual fund providers withdrew cash from financial institutions, the cash reserves of banks decreased. They stopped lending to retain as much cash as possible. Under normal circumstances, a small business expansion loan would have been insignificant to a major bank. However, these are abnormal times.
As a small business owner, it has become more important for you to build up cash reserves so you’re able to weather income dips without relying on credit. And be aware that your bank deposits (checking, savings, and CDs) are only protected by the Federal Deposit Insurance Corporation (FDIC), up to $100,000 in each institution.
Oppenheimer & Company’s star analyst, Meredith Whitney, who has a long history of wading in and telling the truth while others tiptoe around the edge of an issue, says there is $2 trillion less liquidity in the United States now than there was a year ago. In addition, she commented, “In many states, unemployment has increased by 50 percent since 2007.” She explains that these difficulties have evolved from mortgage loan defaults. Whitney does not see relief in the near future due to the trillions of dollars in mortgages that have defaulted, or will default, and which remain on the books of American financial institutions. Much of that loan paper was insured by AIG, which is staying afloat with an $85 billion loan at 11 percent interest from the Federal Reserve Bank in return for 80 percent ownership in the company.
Amid this bleak financial picture, what can you do if you’re a small business owner who needs to secure financing? First, realize it will probably be several months before any impact of comprehensive mortgage relief legislation for banks will be felt by customers. However, according to the KBW Regional Banking Index, many smaller financial institutions are in far better shape than their behemoth big bank counterparts.
Some local banks offer excellent services for small business. To determine which bank is the best for your company:
- List all your current and potential banking needs.
- Visit the websites of banks in your area. Basic business services and pricing are often available on the website.
- Schedule appointments to meet with a small business rep at each bank where you believe you might enjoy building a relationship.
- Go to your appointments prepared with a list of business banking services you need.
- Take notes regarding the answers provided. This quantitative data will tell you whether a bank meets your needs.
- After each meeting, jot down a few notes about how you felt in the bank. Were you treated as a valued potential customer? Was the environment comfortable? Did you like the people you met? This qualitative information tells you which bank you’re likely to enjoy interacting with over time.
Building a banking relationship is a long-term commitment. Your bank must provide the services you’ll need. Try to be certain you select a financial institution that believes in your company and also a place where you feel comfortable conducting business. While it is likely that funds will continue to be tight for the next 18 months, James McKillop, CEO of the Independent Bankers Bank of Florida, says regional and local banks have money to lend and they’re supporting local businesses.