You likely have heard about the new regulations, Dodd-Frank and Basel III—both directed at the financial services industry—and given little notice. But if you’re a small business owner reliant on a local or community bank for your bank financing, you should pay close attention.
The Dodd-Frank Act has established a series of federal agencies and requirements designed to help the government keep a closer watch on the banking system and eliminate the need for future taxpayer-funded bailouts. Primarily designed to keep an eye on the big banks, Dodd-Frank could put community banks, which represent just 14% of banking industry assets but provide 46% of banking industry loans to small businesses, at a disadvantage.
Bank Financing for SMBs May Get Tighter Thanks to Federal Regulations
Fair Lending Laws May Hamper Bank Financing for Small Businesses
Section 1071 of Dodd-Frank—“to facilitate the enforcement of fair lending laws” — is commendable. However, in order to ensure that lenders aren’t discriminating, new requirements eliminate a lenders’ ability to be flexible with borrowers and may push banks into developing standardized criteria for commercial loans, thereby shutting out some potential borrowers. For SMBs flexibility is a key selling point in working with community banks that often make bank financing based on factors that go beyond just numbers.
Costly Requirements Certain to Raise Bank Fees
In a recent U.S. News & World Report article, critics believe Dodd-Frank’s “complex web of regulations” will create a wave of costly compliance requirements for small banks. The same holds true for the Consumer Financial Protection Bureau mandated by Dodd-Frank, which will likely impose extra funding costs on community banks. Both of these costs will be passed on to customers seeking bank financing.
Basel III Could Close or Cause Mergers
Another slam against community banks comes in the form of the impending Basel III requirements, which will require banks to keep enough capital on hand to protect against market downturns and unpaid loans. Many community banks are privately funded and options for raising funds are limited in scope. Additionally, many banks will be required to spend significant money and resources on updating their systems and technology to support these new compliance requirements and reporting.
Many of the requirements will be difficult for small banks to comply with and will likely force them out of business or see them gobbled up by the bigger players. In fact, according to a survey of community bankers put out by KPMG, more than half of respondents said it is likely that their bank would be involved in an M&A transaction, and more than a third said that regulatory changes were the most important M&A driver. Isn’t one of the reasons SMBs turn to community and local banks because they don’t want to deal with a big bank?
Limit Credit Availability
Basel III will also force community banks to re-examine their product offerings due to the increase in capital and liquidity requirements. This may result in banks limiting their offerings to those they can afford to allocate capital to, pulling existing loans, limiting lines of credit, and even increasing the cost of capital.
What’s a Small Business to Do?
The bottom line if you’re a small business is that you may find it even more difficult to get bank financing in 2013, particularly if you’re working with a small or community bank. If you rely on bank financing to operate your business your best approach is to prepare now by diversifying your loan portfolios. Alternative financing options, such as invoice financing, invoice factoring, invoice discounting and asset-based lending to name a few, should also be considered and may be able to be used in conjunction with bank financing to create a cash flow safety new for small business owners.
About the Author:
This post is a contribution from Robin Brown the SVP, Head of Marketing and Communications, at The Receivables Exchange. Robin found her calling many years ago while working as a writer and editor for a consultant firm. Invited to participate in a client meeting looking to launch their new venture, Robin was instantly hooked on the process and so began her transition from writer to marketer. Over the past 15 years Robin has been marketing companies big and small. Her expertise includes brand strategy and execution, marketing strategy and execution, product and services positioning and marketing, field marketing, on-line and social media, public relations, corporate and internal communications.
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