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STRATEGY

Small Business' Real Problem with the Banking System

Increased regulation of bank lending still needs to allow for measured risks that permit sound small businesses to receive funding needed to thrive.

I self-financed Metal Mafia when I first opened it in 2004. The money came from family, friends, and the founders of the company. It was enough to get started but not much more.

After about a year, I needed a credit line to help us pay for larger orders to continue our rapid growth. At the time, I got a meeting with a banker who listened to my story and decided to take a risk on me and my fledgling company, even though we had little more to show than a brief track record, sound financial practices, and a promising future. With his help, I was able to get a Small Business Administration-backed line of credit from the well-known bank where he worked. 

As we now embark on Metal Mafia's eighth year in business, we are again poised to expand. This time, however, when I turned to the bank to request a modest increase in the credit line that we have used responsibly for years, I got a surprise.

Despite our long and fruitful history with the bank and the fact that our company is performing well financially, the bank declined to increase the credit line by $60,000 unless I would agree to shift from acting as a "guarantor" on the line to becoming a "co-borrower" of it. This change means that the bank would have the option to require me to pay it back personally--rather than going to the company first--should it wish to recoup the loan at any time.

As a business owner who has always acted responsibly, and whose business has only grown, this infuriated me. Bank leaders risked billions of dollars on subprime mortgages, but they are now unwilling to invest responsibly in a small, profitable business, without putting in place Draconian controls that make the transaction more trouble than it's worth.

One banker confirmed to me that new government regulations, indeed those that were designed to make it harder for banks to take on risky loans like sub-prime mortgages, have also made it harder for small entrepreneurs to secure funding. Bankers no longer have the latitude to combine a company's spreadsheet and story to get the full picture as to whether or not it is a loan-worthy entity because of new controls developed by the U.S. Treasury's Office of the Comptroller of Currency (OCC). Apparently, the OCC examiners assigned to each large bank require those banks to put in place additional terms (like requiring co-borrowers rather than guarantors) to lines of credit in order to maintain compliance. The result is that bankers are now more married than ever to formulas and ratings, and small businesses are the perhaps unintended victims of what might otherwise be prudent government controls.

So what can be done to put balance back in the system for both banks and businesses?  Why not let banks take on some risk, but mandate a more diversified risk portfolio--one that requires balance to profit-driven risk-taking with initiatives that promote growth outside their own walls?  Why not mandate that they take a sizeable percent of that risk on small businesses, which are not only economic motors, but also job creators and innovation drivers?  Why not add another layer of checks and balances to guarantee that the risks banks take are judicious?

This can be done in the form of restructured loan departments.  Banks that wish to remain FDIC-insured should be required to have loan departments composed not only of loan officers who are good at crunching numbers, but also of business owners, who can understand and evaluate the story behind the numbers. This mix could add mechanisms to be sure banks are not making unwise and overly risky investments, increase funding opportunities for small businesses, and create jobs--at banks and at newly funded businesses.

Both for the health of the banks and the health of the nation, regulation must be proactive, not reactive, and it must focus on ways to make risk-taking sound, rather than maverick.

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Last updated: Jun 26, 2012

VANESSA MERIT NORNBERG | President, Metal Mafia

In 2004, Vanessa Merit Nornberg opened Metal Mafia, a wholesale body and costume jewelry company that sells to more than 5,000 specialty shops and retail chains in 23 countries. Metal Mafia was an Inc. 500 company in 2009.




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