The Bernanke Cycle is Crippling Small Business Lending

Why the $30 billion loan package before congress will not help alone, the missing pieces to the small business economic solution.
Aug. 12, 2010 - PRLog -- Small Businesses have borne the brunt of job losses in the current economic downturn.  “Eighty-one percent of the jobs lost in America were from small business,” said Senator Mary L. Landrieu, Democrat of Louisiana and chairwoman of the small-business committee.  We have coined a term “The Bernanke Cycle”, named after the Chairman of the Federal Reserve who has regulated the banking industry during this downturn, that describes the process by which small businesses implode due to lack of lending by banks.  The Bernanke Cycle works as follows:

  1. Small business gets battered by the economy.  The business is still profitable but less so than before.
  2. The business sees its lending facility pared back or eliminated by their bank.
  3. Small business cuts jobs, moves to a smaller building or stops future equipment orders so that their expenses reflect the reality of their new lower revenues.  
  4. These cuts also negatively impact other small businesses associated with the small business’ supply chain which gives the cycle a multiplier effect.
  5. Small business owner takes their austerity program to their lender in hopes of restoring some of their lost borrowing capabilities.  The lender looks at the lower revenues, layoffs and downsizing as a further deterioration of the business.  The lender lowers the business’s line of credit even further.
  6. The business now has to run on even less cash and is not able to replenish inventory at the levels needed to grow its business.
  7. Go back to step 1 and repeat until the business becomes truly uncreditworthy and eventually becomes insolvent.

So what can be done to break the Bernanke cycle?  The Federal government must pass the small business bill which will give $30 billion to community banks to lend to small businesses.  Community banks are the primary source of bank credit for small businesses.  

This however is not sufficient as we need to ensure two things happen:

  1. Bank underwriting standards need to be adjusted so that small businesses can actually qualify for a loan under the current economic conditions.
  2. Small businesses need to be prepared to meet the underwriting guidelines of the banks.

 Underwriters at banks lending to small businesses need to look at their small business loans criteria.  Credit benchmarks must be adjusted to take into consideration the current status of the economy.  This means that bank underwriters should take a longer view of the performance of the small business.  They could look at financial performance over a 5 year period instead of three years.  This should enable the lender to possibly provide a larger credit line than would be warranted by strict adherence to traditional underwriting guidelines.  These additional funds will enable businesses to invest in growing their businesses again and start the process of reversing the cycle and hiring will follow.  The proposed small business financing legislation makes some guarantees around the funds that the Federal government is providing to community banks so the banks will not be taking the additional risk of lending to small business without the federal government providing a backstop.  While this creates some exposure for taxpayers, it is an instance of taxpayers making an investment in their personal financial well being.  The Federal government should also insert a “use it or lose it” provision which would state that if 50% of the funds were not lent to qualifying small businesses within three years then that 50% would have to be returned at that time.  The goal would be to provide an incentive to the banks to create more small business loans.

Several of the bankers that we, Industry Source Networks, have spoken to said that close to 50% of the small businesses that they speak to about small business loans drop out of the application process without applying for the loans.  The third leg of the small business financing tool is making sure that the small business is prepared for the loan process and stays engaged as the bank does due diligence.  Industry Source Networks has developed a fully integrated system for enabling qualified small business owners to get their loans called the Industry Source Loan Manager.  It is a free system where Industry Source Networks only get paid when the small business owner gets their loan.  The Industry Source Loan Manager consists of:

  1. Industry Source Loan Organizer: Tells small business owners what information they need to find, analyzes the information and helps them present it to potential lenders.
  2. Industry Source Loan Matcher: Matches the small business owner to the bank that is most likely to lend them the money they need to grow their business.
  3. Industry Source Loan Tracker:  Tracks the loan application and resolves issues early in the process to maximize the chances for a quick approval.

“We are committed,” said Othniel Palomino CEO and Co-Founder of Industry Source Networks, “that any small business that should get a loan, gets a loan.”

The Industry Source Loan Manager is a free service to small business owners.  Industry Source Networks only gets paid when a small business loan is approved.

Industry Source Networks is committed to breaking The Bernanke Cycle and helping small businesses  lead our country out of its current economic downturn.

If you’d like more information about this topic, or to schedule an interview with Othniel Palomino, please call (206) 604-0714  or email

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