Part Of The Economic Solution?
Today, a quiet but real crisis exists in business lending, with a high rate of business failure and defaults. In researching the present economic crisis, a group of economists, consultants, accountants and attorneys working for the Epicurus Institute discovered that business lending was a key factor. It is not, as many believe, solely a mortgage mess.
When businesses fail, it is not simply the enterprise, but the owner and employees at risk of bankruptcy. Owners, particularly small to midsized business entrepreneurs, are experiencing failure of their businesses at alarming rates. That results in rising unemployment figures as shops and offices close, often under the weight of oppressive debt.
The Community Reinvestment Act, intended to help minorities, women and veterans obtain fair opportunity for credit, is being unintentionally thwarted by tight credit in business lending. The result is that many that would normally qualify under CRA cannot borrow because the credit requirements are too high. Today, only 26 percent of Americans can qualify for a business loan at most commercial banks.
When potential entrepreneurs know they cannot finance their business, they tend to wait until the market is easier and loan financing is available they can qualify for before they start. This results in lower volume of new incorporations and lower corporate franchise taxes to the states. New York, one of the leading states for business incorporations, is seeing dramatic reductions in start up enterprises and significant shortfalls in business tax payments as many existing companies are failing. With that, unemployment is rising, and the costs to the state go up accordingly.
Merit is not a factor in lending. Since the late 1990s the banking industry began using a credit scoring and collateral model for making lending decisions. In fact, for loans less than $100,000 the process is almost completely automated. Machines do not evaluate the business, or the merit of the entrepreneur, but only a stack of mathematical calculations.
Around the same time, banks began to eliminate the position of analyst. These were people who would read and review a business plan as part of a loan. Business plans tell others what the entrepreneur knows about how to run the business. They explain how money will flow through the enterprise and how income will be earned.
Without a review of business plans, bank underwriters cannot determine the merit of the borrower and whether the business can survive through the term of the loan.
Why is this important? Because when businesses fail, they take local jobs and put a strain on the economy of a community. During the 1970s, we saw many of Rockaway's businesses close, and it took more than 30 years to revive the community. Stores remained closed. With business closures, there's also a direct correlation to increased crime rates.
A potential solution is currently in the works in Congress. Called the Business Credit, Education and Evaluation Amendment, the bill would create the infrastructure needed to put analysis back in business lending. This time, it would be a bit different. The analysts would be independent, third-party evaluators, certified under the workings of this legislation and trained to give fair and reasonable evaluation of a business plan. They would help business owners understand what is needed to be a success through education and would provide a score, not on the individual's credit, but on the merit of the business to succeed.
Representative Gregory W. Meeks is the originating sponsor of this legislation that is being co-sponsored by many leading members of the House in both parties and will have a companion bill in the Senate. The bill is supported by many organizations and business groups because it makes it possible for banks to make better business loans based at least in part on merit.
Representative Anthony Weiner has expressed interest in being a cosponsor.
The people of the Rockaways, and our Congressional representatives can be at the forefront of the solution to this business lending crisis.