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Bank of America is a huge and therefore convenient target for journalists to bash. Recently the Los Angeles Times assailed B of A for cutting "some" small business credit lines. (Maybe they cut "some" but increased more of them!)
January 13 -
The idea that small business spurs job growth is a powerful, if not biblical, force in economic theory and public policy. But what if this bedrock belief about the jobs-creating power of small business and isn't true — or, at the very least, is missing a big part of the story?
January 1
Citigroup Inc.'s latest effort to increase its lending will be an exercise in thinking small.
The bank said last week that it is partnering with the Enterprise Community Loan Fund, a community development organization, to
Citigroup executives call the investment an initial effort that could be expanded if it is successful. And the bank has gotten adept at partnering with outside organizations for its small-business lending. For example, in 2008 the bank entered a five-year agreement to
These unconventional arrangements
"They've been doing it for years. It makes a great press release to show their commitment to small business lending," says Ami Kassar, founder and chief executive of Multifunding, a small business financing consultancy.
The new Opportunity Fund will
Kassar says he "applauds the model of bigger banks putting money into smaller institutions in order to distribute it to smaller businesses," but warns that this latest venture is not reaching the neediest small businesses: those with less than $1 million in annual revenue.
"Companies with revenue of $5 million to $10 million, if they are doing ok, they are not having nearly as hard a time getting financing as smaller companies," he says. "I'd be a lot more excited if they [Citigroup and Next Street] were helping urban businesses of $1 million or less. These are the businesses being most nailed in the credit crunch, particularly the retailers."
There were about 5.1 million firms with under $1 million in revenue in 2007, according to data from the U.S. Small Business Administration.
"By the time you get to $3 million [in annual revenue], that's pretty big for a private firm," adds Mitchell Petersen, a professor of finance at Northwestern University's Kellogg School.
Nevertheless, the partnership may still allow for lending to smaller firms than would typically receive funds from Citigroup or one of the other megabanks. The top four banks all classify small businesses as any with
The participants in Citigroup's new venture argue that small businesses of all sizes need the advice and funding they will offer. Ronald L. Walker, II, president of Next Street, told American Banker in an interview on Monday that Next Street was intentionally focusing on the $3 million to $60 million group.
"We call this group the missing middle. They need this level of advice, which is more than just technical assistance. They need strategy and pricing models and growth capital," he says, adding that the parties hope to make the first loans sometime later this year.
Because Citigroup's funding is paired with advisory services, it could help restore the more personal aspect of lending known to bankers in eras past, says Northwestern's Petersen.
In the past lending officers "often provided informal advice and a broad network of connections," says Petersen. That means a lender might have told a small business owner that he needed to make certain changes to production or cut expenses before a loan would go through. In an automated process, a lending request is more likely to get the thumbs up or thumbs down without that interaction.
Petersen notes that the challenge for those involved in the partnership will be evaluating the success of the program.
"One way to view it is as some kind of experiment," he says. "Often the problem ex-post is determining how much of the outcome was skill and how much of it was luck."
Citigroup will be evaluating how the recipient businesses' fundamentals are shaping up and how the consulting services contributed to their success, Andrew Ditton, co-head of Citi Community Capital, told American Banker in the same interview on Monday.
"We expect to see businesses adding production capacity and expanding their customer base, and hopefully increasing revenue — a real link between the advisory work and use of the capital from the fund," he says, adding that the bank could expand the partnership down the line if the venture proves successful.
"Hopefully it's a model that we would expand in the future. Something we could support at the level right now — call it an R&D phase — and expand that support as it demonstrates its effectiveness," Ditton adds.
