Every day, we hear of new ways the mortgage/financial/liquidity/Wall Street crisis (take your pick) is going to affect our lives. As MN2020 Fellow Lee Egerstrom has pointed out in recent articles, what happens on Wall Street and in Washington affects Minnesota too, and at least for now, things are looking bleak. Credit is hard to come by, leaving entrepreneurs, investors, and bankers united in their dismay. But for small business owners, things may not be quite as bad as they seem.
Minnesota 2020 spoke to Julie Causey, chair of Western Bank in St Paul, and Marshall MacKay, president of the Independent Community Bankers of Minnesota, to find out how the crisis is likely to affect small business owners in Minnesota. Both Causey and MacKay suggested that even though the economy is far from healthy, Minnesota’s small business owners don’t need to panic. Banks that stayed away from risky lending will likely continue to lend with similar underwriting standards as before the crisis, with the problem being that fewer businesses are likely to meet these standards. The fall in Small Business Administration (SBA) lending could be partly caused by this shortage of entrepreneurs meeting the underwriting standards required by healthy financial institutions. The collapse of large banks that were also SBA lenders, like Lehman Brothers, adds to the drop in both the amount and number of SBA loans. This is not to say that credit is easily available, but rather than once the immediate crisis passes, credit lines will become somewhat more fluid.
Part of what’s keeping Minnesota relatively secure is the abundance of community banks who, unlike big commercial banks, lend “the old-fashioned way” – this means no reliance on short term commercial paper and no risky lending. As the Star Tribune recently pointed out, local banks are still making loans and profits. MacKay noted that many independent banks outside the metro area are reaping the benefits of historically high farm incomes and commodity prices. These banks “are having their best years”, but it’s important to keep in mind that recently commodity prices have also taken a downturn and it is unclear how this will affect rural financial institutions.
As Minneapolis Mayor R.T. Rybak recently said, nothing is completely “recession proof” and the national economic downturn should not be ignored. MacKay pointed out that small banks can be thought of as boats in the ocean, “a big wave will rock the boat, but as long as it’s well built, it won’t tip over”. National trends affect unemployment, interest rates, and credit availability. Community banks and small businesses with solid fundamentals are not going bankrupt, but with the economy weakening, it is likely that businesses will experience a fall in consumer activity. Already by the October Economic Update, which looks at data up until the end of September, sales tax revenue was below forecasted values and $8million below last year’s level. Since then, to quote Minnesota’s national economic consultant Global Insight Inc, “conditions in the financial markets have worsened even more dramatically”.
“The bigger problem is that many family businesses have lives tied to business health” said Causey, “if business isn’t doing well, families bear the burden”. Using sales tax revenue as a proxy for sales revenue, it becomes apparent that Minnesota businesses are going through a lean patch. The problem is compounded when house prices are down and the stock market is crashing.
So what should small scale entrepreneurs do in the face of a credit crunch and potential falls in revenue? “Go back to basics”, Causey advised, “as long as they’re working with healthy financial institutions, small businesses and non-profits should be just fine”. MacKay added that the FDIC’s recent decision to raise insurance limits from $100,000 to $250,000 should make small business feel a little safer and, by preventing the need for multiple bank accounts, make banking somewhat easier. While the move is supposed to be temporary, it is likely that Congress will decide to make it permanent.
Causey also pointed out that in tough times, “it pays to work with banks that do good work in the community”. One way to do this is to look at a bank’s CRA Rating, a measure of how well the bank meets the needs of its community, including middle- and low-income households.1
At this time, it is difficult to say what to expect from the economy and the bailout. It is important to remember that Minnesota is not immune to happenings in New York and Washington or, for that matter, even Tokyo or London. As other MN2020 articles have noted (see here and here), the immediate horizon is bleak. But Minnesotan banks and businesses have generally maintained healthy financial practices and beyond the immediate crisis, there may yet be reason for optimism.