A run on the banks?

Bankers. Again. . . Making Everything WORSE despite getting Billions in Public Money

Hal Turner,

1 August, 2020

From a Business guy . . . 

Stiff drink time. For those new, here is my background. I am a lawyer by trade but never practiced. I own and operate a consulting company the end goal of which is to set up & provide loans through multiple funding channels to franchisees of large and small chains nationally.

The chains I work with many of you will be familiar with —Dominos, Jersey Mikes, Massage Envy, European Wax Center, The Joint, Club Pilates, Jimmy Johns, Wingstop, Orangetheory, Moes southwest. . . And many others. Point is I have BROAD spectrum national exposure to many industries.

The banks I work with are SBA, conventional lenders who service smaller loans under 2mm and generally smaller operators of these franchise systems, and then larger banks who provide loans to larger operators from 2-50mm. I’m short — 20+ banks across ALL spectrum of SME lending.  (Note: SME finance is the funding of small and medium-sized enterprises, and represents a major function of the general business finance market – in which capital for different types of firms are supplied, acquired, and costed or priced.)

I fund 400-500mm in loans per year through these banks. In February we were on pace to fund well over 500mm and potentially 750mm — growing exponentially year over year. STIFF DRINK TIME. Since April 1st we have funded 5mm total through only 2 banks. Let’s dive in as to why.

SBA banks — they have lending limits to 5mm. Congress has authorized them to go to 10mm in the CARES Act but they have ignored it. This will become important later. They currently have guarantees from the govt at 80% - pretty good right? DOESN'T MATTER THEY STILL WONT LEND.

In fact they are pushing the government to guarantee 90% of the loans (and likely on their way to 100% — see my prior posts on the de facto nationalizion of the banking system). In short SBA has SHUT OFF BORROWERS waiting for more from Uncle Sam.

Current excuses ARE PLAYING BOTH SIDES (and this applies to all banking segments). A chain with increased sales since pandemic — no loan. “We want to wait to see if sales increases are sustainable” Doesn’t matter that sales are up. They may not be “sustainable.”

On the other side for businesses with sales down — “well we just aren’t comfortable sales will rebound and we have concerns over COVID”. So sales up = no loan. Sales down or flat = no loan. Operator size IRRELEVANT. Are some banks lending? Yes. This is 75-80% of SBA banks.

They are also being EXTREMELY selective on industries they will do. If you are an industry with “large public gatherings” you better pray to Santa Claus for money.

On to conventional banks. Little known fact is that 50+% have LEFT THE FRANCHISE LENDING SPACE ENTIRELY. Of the remaining 50% — 90% of those are not taking new clients. And they are not lending to their existing clients generally.

To get conventional banks to lend (think JUMBO loan type issues in the mortgage market) you need to be an A+ borrower in a proven long standing brand. Sales need to be up or flat at almost every individual unit and you need lots of time in business. Let’s go through 2 examples.

One client is a jimmy Johns franchisee. He owns 20+ units. He has 7mm in debt and 3mm in EBITDA. That is a 2.5x leveraged deal. GOOD & normally easy. The problem is lenders do not want to touch the brand because they are concerned trends aren’t sustainable others just say this:

Let’s look at the hoops an SME borrower has to jump through to get a loan CLOSED that he was ALREADY approved for (Hint — it hasn’t closed)

One more example to drive it home. One of the SBA banks I work with is among the top 5 by volume of loans closed in the country. I will not say who so don’t ask. Their rep told me yesterday they have closed TWO loans since MARCH. In short SME IS CUT OFF from CAPITAL.

Now let’s talk about government policies like EIDL loans (Economic Injury Disaster Loans) specifically. Almost every biz owner I know took an EIDL loan. SBA puts a lien on all of the businesses who take one. Now imagine you are a conventional lender. You require a first lien position on all assets to do a loan.

The customer wants to buy 5 locations or refinance debt. Problem is the same. Because the government HAS A LIEN — to do this deal either the government has to subordinate (they won’t so it’s a non starter) OR the borrower has to refinance the EIDL from 30 years to 7.

This KILLS their cash flow and makes refinancing or buying units AND IN TURN GROWTH — much more difficult. Conventional lenders with generally better terms and better rates are FORCED out of the market even if they would otherwise be willing to lend.

Now let’s get back to that pesky SBA limit. If you hit the limit. And conventional loans are closed off to you because the lenders don’t exist or because of reasons like the above — WHAT CAN YOU DO? the answer is the scary part and it’s stiffer drink time.

The ONLY avenue left for operators to grow will be (gulp) private equity. Well take a look at all of the concepts having problems. They have one thing in common — private equity vultures.

The bottom line is SME can not access new capital easily. Even if they can actually qualify and a bank is willing to lend — government policies like EIDL have made all non-government lending extremely difficult for the borrower to do financially. This will DESTROY growth.

In addition we are a debt based economy. I will leave you with this — how exactly are jobs to be preserved and businesses to stay afloat if they cannot access capital effectively?

Answer: They can't.   The destruction of private businesses in the United States is orchestrated and deliberate.  

If Bankers do not open up the lending, the nation will be destroyed.

The public should give them two weeks from August 1 to re-start loans and if they don't, there should be a deliberate RUN ON THE BANKS to intentionally destroy them.