Why Banks Don’t Like Extending Credit to Businesses

It’s the middle of March, 2009 and I’m once again, writing a new past due notice to one of my clients, a business owner based on the west coast. Mirabella, the owner of a novelty item company, is now almost a year past due on the money she owes me for work I did for her last summer.

I’ve known Mirabella for some time and we have many mutual associates to whom she also owes money. It’s almost a running joke among our circle of friends. I knew it was only a matter of time before she owed me money, too.

“But, you’re still taking a full paycheck,” I always argued when I heard her explanations on why she couldn’t pay back a loan to one of our friends.

Her excuse: “That’s personal money. It’s not the same account. It’s illegal for me to pay company debts from my own account.”

“Whatever!” I shrugged.

Last summer, I, like many before me, finally became one of Mirabella’s statistics. She now owed me money, not because I’d loaned her cash or bought groceries for her when she forgot her wallet, but because my company had done work for her company.

“Of course, you can wait to pay me,” I said. “But if you even pay a little each month, I’ll waive the late fees,” I explained. “How about $100 a month?” I suggested.

Predictably, I didn’t receive any payments, just an occasional call from Mirabella so she could explain that she couldn’t pay me because of this or that.

“I just want to kill myself. I double ordered a product from China for a client and now I have to eat it,” said Mirabella in August.

In September, there was a light at the end of the tunnel. “This retired man named Frederick is loaning me money so I can make payroll. I think he wants to date me,” said Mirabella.

In October, things were dire again. “McDonald’s is rejecting all my credit cards. I can’t even buy a sausage biscuit,” she whispered from the drive-thru as I listened to the cashier on the speaker tell her that her American Express card was denied.

In November, Mirabella had to dip into her personal money. “I had to write a huge check to my brother to buy back his investment,” she sobbed. “My family is making me do it. It’s his fault. He sucks at his job.” I found out later that her brother’s home was foreclosed upon, the one he was given by his mother. This is especially ironic since he works as a mortgage broker.

In December, things were looking up again. “My Cousin Chip came to visit me and gave me some bonds,” she said happily.

“Can you pay me, then?” I asked.

“I’m not cashing them. I’m keeping them for my retirement,” she said.

“Ah, Mirabella!” I sighed.

Finally, in early January of 2009, it seemed justice was going to be served. Mirabella called. She was angry, “The bank froze all my accounts. My personal account, too! I should sue them. They can’t do this. I’m a corporation!”

Mirabella became a small business owner so she wouldn’t have to answer to anyone but herself, pull a big paycheck to buy expensive designer clothes, and jet set across the globe. Her novelty company was founded on money given to her by her family. Although the company has brought in some money from actual sales, it primarily survives on loans from friends, mostly older men who have the extra cash, think Mirabella is sexy and cute, and enjoy her company. Mirabella’s real skill isn’t making money from sales, it’s making money from loans through her ability to win sympathy.

Mirabella had managed to make ends meet for several years the way many small business owners do. In addition to loans, she had secured several lines of bank credit and multiple company credit cards. Each month, when funds were short, she didn’t pay what she felt she didn’t have to pay; then moved money around by paying one bill with another line of credit, and so on. Her accountant, also a former boyfriend, did his best to help her company appear solvent and successful. He also continued to pay out her full paycheck, despite revenue shortfalls.

Although it’s fun to hang out with Mirabella and enjoy recreating in the illusory world she’s built around herself, I knew it would have to end someday. Seeing her fail was bittersweet. She can’t manage money, doesn’t pay anyone back, and deserves to be shut down. However, she is a friend, so I continue to feel sorry for her.

Then, one day in mid February, Mirabella called to say all was right with the world again. “Cousin Chip and I are starting a new corporation. He’s paying the start up costs and opening up a new bank account in his name.”

“What are you going to do about your old company?” I wondered.

She didn’t answer.

But, she did add: “I can’t pay you with the new company money. It’s a different corporation.”

Hmpf! This is what I get for doing business with friends, I thought to myself.

It’s now March of 2009, nearly a year since I did work for Mirabella. She called last week to say she had been skiing with an old boyfriend who is recently divorced and was now staying with him at his vacation home in Florida. Next week, she is heading to Europe with a different man who she thinks might pop the question. She needed advice on the closest spa so she could get a pedicure.

“Stop by and we can go to the spa near my house. Then, you can treat for both of us. Consider it a down payment on the money you owe me,” I suggested.

Mirabella was a no-show. Big surprise.

I have little hopes of ever collecting because Mirabella herself doesn’t owe me money, her “now old” corporation does. In her mind, it’s my loss.

In the United States of America, owners of corporations are protected from owing money their company owes. That’s one of the principal reasons you incorporate – to protect personal assets. By incorporating your business, big or small, you won’t lose your house, your car, not even your credit rating when the bill collectors come a-callin’. You become divorced from all fiscal responsibility should the company go south, despite how much your own irresponsibility led to its downfall.

In Mirabella’s case, when she ran out of money, she simply started a new corporation. If she’s unable to resurrect the old company, she can simply shut it down, cutting off any creditors. Mirabella’s big paycheck is safe. The new corporation doesn’t owe anyone any money, yet.

President Obama announced today in a press conference that he wants banks to open up the floodgates and extend credit in order to get our economy moving again. He plans to increase the amount the Small Business Administration will guarantee so that there is less risk for banks who award lines of credit to small businesses. However, there is still no increased accountability to ensure that companies will pay the money back. There is no examination of start up businesses applying for lines of credit to ensure that these are not run by people who ran another company into the ground, then hung a new shingle outside their doors in order to appear to be in good standing. (See the video of the President's speech at: The Huffington Post website.)

Lines of credit should come with plenty of strings attached. Corporations should be required to put all owner’s names on the bank loan to secure the debt. Each owner should have to pass their own credit check. If you were part owner of a corporation who failed, and the failure was not due to unforeseen circumstances, such as your company was destroyed in an earthquake, you should not be allowed to get a new loan until the old corporation's debts are fully paid.

If you receive a loan and your company fails while you continued to pay yourself, you should have to sell your Mercedes, yacht, or vacation home to pay back the bank. If you live in a multi-million dollar home while everyone else lives in an average 3 BR, 2 Bath $200,000 home, you should have to sell your expensive home and downsize in order to pay back old loans. No more of this, “protecting personal assets” bull hockey.

It’s no wonder banks are so nervous about extending lines of credit to businesses. They should be.

Minorities or Flippers?

My husband and I got into a heated argument with my neighbor over politics outside a popular Central Florida movie theater Sunday afternoon. My neighbor, who had just rolled in on his Segeway with his young son to catch the dollar movie showing of “Get Smart,” noticed that I was wearing an Obama Biden t-shirt. The neighbor, still perched on his Segeway, rolled us into a corner and began to pick a verbal fight. He started off by theorizing that the election was fixed for Obama to win.

“Fixed?” we asked.

“Acorn. He’s got Acorn in his pocket. That’s what, 20% of the votes?” the neighbor said.

“Huh?” we wondered. The neighbor spoke with such conviction and belief, yet this was the first we’d heard of such a conspiracy theory.

“You’ve heard of Acorn?” he asked.

“Well yes,” we both agreed.

“I know it’s a non-profit,” said my husband, “but I don’t know what it is exactly.”

“I don’t know where you get your information, but I’ll look it up when I get home,” I promised, and began to leave. 

I found out later by researching on the internet that Acorn stands for “Association of Community Organizations for Reform Now.” Their mission statement explains that they are the nation’s largest community organization of low and moderate income families, working together for social justice and stronger communities. Acorn’s current campaigns include helping homeowners facing foreclosure; assisting with Gulf Coast recovery after hurricanes ravaged the area; immigration; advocating for workers to get a living wage and paid sick days; and increasing voter participation in elections.

The latest anti-Obama spin, which I was able to only find on Christian, conservative and “right-to-life” websites, claimed that Obama was single-handedly guilty of causing the mortgage meltdown because he had worked with Acorn. Acorn had advocated to help low income, moderate income, and minority families get loans when old standards disqualified them. The connection between Obama and the crisis on Wall street is a stretch, at best.

Acorn was not the only advocacy group to assist minorities in getting loans. A Massachusetts Community and Banking Council (MCBC) report from June 2004 studied the rate of home loan denials and found that as recently as 2002, blacks were denied loans about two-and-a-half times more frequently than whites. The 50 Banks participating in the MCBC agreed to take a “second look” at denials to ensure that fair lending procedures were followed. However, no special exceptions would be made in granting loans to applicants who do not qualify. Low credit scores continued to be the primary reason for denial.

But my neighbor wasn’t done, yet, and he asked me, “Tell me this. What did you think of the bailout?” 

“You mean the latest one?” I asked, “The $700 billion bailout?”

“Yes, the one this morning,” he said. 

“Well, I didn’t think they had a lot of choice, this late in the game,” I said, “They had to do something.”

“Well, I didn’t like it,” he said. “You know, I’ve been waiting for this. All those Fernie mac loans defaulting – “

“You mean Freddie Mac and Fannie Mae?” I asked. 

My neighbor was confusing the $200 billion bailout of Freddie Mac and Fannie Mae on September 7, which Treasury Secretary Henry Paulson of the Bush administration did independently and without oversight, to the more recent $700 billion bipartisan bailout agreement of Wall Street on September 28, geared to save banks from collapse who have extended credit for everything from student loans to home loans to investment capitol needed to start a business.

“Yeah, just call ‘em Fernie Mac and you’ll know what I mean. Which are mostly to minorities –"

“No, there aren’t enough minorities in the entire country to encompass all of those loans,” I said, “Maybe there’s 10 % minorities in the overall population.”

My neighbor pondered this and agreed, “That’s true. Where I come from, you don’t see many.”

I checked the facts and the numbers are: 24% of the US population is comprised of minorities, according to the 2006 census. 

“And my loan is insured by a Fannie Mae/Freddie Mac program,” I said, “In January, when I qualified for the loan, I didn’t have to pay a down payment. But by the time May rolled around when I actually found a house to buy and closed, not only did I have to put money down, the rates went up. Plus, I now have to pay PMI (Private Mortgage Insurance), not because of anything I did, but because of what other people did,” I explained. My PMI payments add an extra $100 per month to my mortgage.

Freddie Mac and Fannie Mae are government sponsored private businesses who underwrite mortgages written by the banks which grant the loans. You can actually buy stock in both companies and many stockholders are located overseas.

According to a July 11, 2008 New York Times article, $12 trillion has been loaned out as mortgages to borrowers in the United States. Freddie and Fannie currently "own" $5.2 trillion in loans, which is slightly less than half of the total $12 trillion total.

Of the $5.2 trillion, $3.5 trillion of that amount is in guaranteed mortgages. The other $1.7 is in unsecured debt, according to a Sept. 11 Bloomberg news article.

Only 1.15% of Fannie Mae loans have defaulted, according to a July 23 Bloomberg news article which paints a very descriptive picture of the eleventh hour before Fannie and Freddie theoretically crashed.

I was unable to find any statistics on the percentage of loans that were taken out by minorities, nor the percentage of their default rate compared to those of whites. However, I do know that after searching high and low for a house to buy in Florida, only one of the 72 foreclosed homes I looked at were owned by names which implied them to be of Hispanic or Asian descent. In fact, most of the homes on the foreclosure list in January were owned by “flippers,” individuals who mostly reside in other states, bought up several homes at once, usually by not paying a down payment, then attempted to resell the homes quickly at a higher price as the housing market increased at a record pace. When the price of the homes escalated to the point where an ordinary buyer could not afford them, that's when the flippers were left holding the keys. Consequently, the banks were left holding the loans with little to no hope of repayment. Banks tried to sell the homes, but discovered that the values they were basing the loans on were imaginary – falsely inflated by the excitement of speculative flippers.

My landlord, who lived in New York and had a name indicating Italian descent, was a perfect example. My property manager said that “he is in trouble” and “still owns over five houses he’s trying to sell in this county alone.” He bought the house I was renting on spec from a developer for $339K in late 2006. He sold it at a loss for $210K in 2008 after the developer lowered the prices on identical new homes – that’s when I had to move. 

I then bought a house listed as a short-sale, or “pre-foreclosure” sale. The man who owned it was also not a minority by any stretch of the imagination. He was a native Floridian, had been given the house by his parents and borrowed against it to fund a business enterprise which unfortunately failed, thereby requiring him to sell his assets. 

In fact, I only know one individual personally who has lost their home to foreclosure in the past three years. My friend Shelley is not a minority, unless you consider being a woman as being a minority. She lost her home after her mother, the primary breadwinner in her family, died unexpectedly due to a flesh-eating bacterial infection. 

The belief that only minorities are defaulting on their mortgages is just another symptom of our racist and prejudiced population. In fact, Florida law still prohibits Asian immigrants from buying homes in the state of Florida, per the Florida Alien Land Law of 1926. Voters will have an opportunity to repeal this law in the November election.

My neighbor continued with his argument.

“I’ve been watching the real estate market and waiting for the homes on the beach to come down to the right price so I can buy them up. I want them to come down to $50,000, but they’re not there, yet. This messes me up,” he said.

“Oh, you want to flip them?” asked my husband.

“Yeah, but they’re not low enough, yet,” he said, “And now they never will be ‘cause of the bailout.”

We argued extensively about other issues, everything from the details of the bailout to whether or not John McCain lied when he said he was not planning to attend the debate on Friday. In the end, the movie was starting and my neighbor wanted to go. We let him have the last word, but it made no sense.

You always know you’ve won an argument when your opponent resorts to shouting nonsensical blabber.