Residential Lighting: What happened to the credit markets this fall?
Steve Strauss: To reduce risk, big banks took loans, divided them into groups and sold them to investors. At the time, they were good loans; people were paying on them. Home equity was going up, and lendees were paying a high interest rate -- 8 and 9 percent. It seemed like the home-equity bubble was never going to burst. When it did, people started defaulting. All of a sudden, banks all over the world had bad loans on their books. Lenders became more cautious and started changing their lending policies. As a result, money has become harder to get.
Residential Lighting: What does that mean for small businesses like lighting retailers?
Straus: Another factor, which nobody talks about, is that a lot of small businesses get their loans from the Small Business Administration. The SBA doesn’t give the loans, but it guarantees them for various lenders. The Bush administration cut the SBA budget by about 50 percent over the last eight years, so SBA loans have been more difficult to get.
Residential Lighting: We hear that many banks are sitting on government bailout money instead of lending it. Is that true?
Strauss: Yes. Eventually, they’re going to lend that money because the government now has a figurative and a literal stake in these banks. They’re just trying to figure out how to start lending again intelligently and prudently. It’s not going to happen right away, but eventually it will loosen up.
Residential Lighting: What can lighting showrooms do in the meantime?
Strauss: The best thing for small retail businesses is to work with local and regional banks. Local banks have always had prudent lending standards and, as a rule, are not in trouble right now. They are still making loans. It’s always good for a small business to have a relationship with a local banker, rather than deal with institutional lenders who may not know them.
Residential Lighting: What about lines of credit?
Strauss: Credit lines are harder to get now, so you have to think of creative solutions. I don’t love the idea of using credit cards, but they can be a great solution. You can use one with a lower interest rate or transfer existing balances to a card with a teaser rate. If you do that intelligently and you have a plan to pay them back on time, it will work. I’ve also seen companies go to their wholesale distributors to get credit. Perhaps lighting showrooms could get some lighting on consignment. I would also like to mention credit unions and local governments—both might help with funding.
Residential Lighting: Will there be any further fallout?
Strauss: There is the fear that credit cards are going to become harder to get because people will start using them more and will start defaulting. That may be the next domino to fall. I do think the time of easy credit is over. Standards are going to be higher, and loans are going to be harder to get for the foreseeable future. But, the $700 billion bailout package is not insignificant. It is a lot of money. It’s going to take awhile for lenders to figure out how to use that money, but Washington will put pressure on them. I’d say that within six months things will be better—not as tight as they are right now and less frightening economically and credit-wise.
Steven D. Strauss is a lawyer, USA TODAY columnist and author of “The Small Business Bible.” His blog, “Business as Unusual,” can be found at www.MrAllBiz.com.