Decline of Rural Lending Crimps Small-Town Business
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But, on the other side of that, if financing is not available at the right time a business can fall apart pretty quickly. If employees are not paid, they quickly look for other work. Machinery falls apart if not maintained. There needs to be a reliable source of capital for any business to succeed.
It is up to the business owner to take out loans and allocate those resources responsibly.
Isn't it up to the bank to allocate its resources responsibly?
This is allowed by deregulation, and practical because of the Internet. Banks don't need lots of little branches. But their customers did.
Most of the little guys did not get in trouble in 2008. They did fine and didn't need bailouts.
What these people need to do is shift to a) online banking (where the entire US is one market) and b) start paying their employees in direct deposit.
That is one side though: the other is that small-town USA is dying. No amount of banks can solve that problem, because it is a problem of opportunity and because declining opportunity is a spiral that keeps going down.
Unless you enact some version of the old British poor-laws or limit movement to the cities like China (neither would be legal in the US) you can't stop that.
Propping up slowly dying towns with subsidies in the form of EBT and social security/disability and Medicaid surely has less economic utility than putting programs in place that will help the people in dying towns find productivity elsewhere.
I understand that people grow attached to their homes and their communities, but the idea that people are entitled to prosperity in the location of their choosing is ludicrous. With telecommuting and remote work it becomes more possible, but you've still got to close the skills gap between the (largely uneducated) rural small towns and economically productive cities.
And yes, there were a few months of a bank failure a day. That still means only a very small minority of small banks really got into trouble.
It's also not very strange for little banks to, on occasion, get into trouble close and/or merge and/or get taken over. A normal level for the US would be about one per month. Europe is still at more than one per week, for the EU (and frankly it's going down because EU is running out of banks to fail, not because conditions are getting better).
That said, if you compared the odds of a small bank needing a bailout versus a big bank needing a bailout, you would in fact find that small banks didn't really need bailouts. They also never got them, needed or not, and everything was fine ... well, mostly. ALL of the big ones needed a bailout, and if they wouldn't have gotten them, ... well we won't know, will we. It would have been very, very bad for stocks, certainly.
But when I try to find good ideas to arbitrage it, I'm stuck. Of course, you can work remotely in San Jose and live in Wyoming, but this doesn't scale. I suppose opening a rural-oriented bank, to fill the gap, would do the job. Maybe it would be better to make a Bank-in-a-box kit (Sarbanes-Oxley-compliant, of course) and sell shovels to the gold miners? Does anyone have any ideas, good bad or crazy, that they are willing to share or discuss?
They've really doubled down on rural areas, mostly playing off of the fact that people don't want to drive long distances to stores for basics and how much cheaper they are than the competition.
Dollar General acknowledges the above, but I wonder if any of their success is related to that distortion?
Well, that does scale. Which is why you have TCS, Infosys, Accenture et al.
Twelve miles north of Roxobel in Woodland, population 729, Sharon Ramsey closed the DeJireh Grill because, she says, she couldn’t get bank financing. At first, she says, the restaurant “was turning a profit, but it was just enough to stay open.”
Small town businesses cant turn a profit and as such shouldnt be getting a loan. They are barely keeping the lights on.
Happy New Year from Captain Obvious ;)
I'm no business expert, but I'm guessing the story is different for small town restaurants. If you've got one that's been open for 3 years, it's probably fairly safe to say that its growing days are over. By then, everyone in town knows about it, so there's not much prospect for expanding the customer base. If anything, I'd expect the company's business to slowly dry up over the long haul. Money is flowing out of small towns, so, even if every single customer is a loyal regular, they'll still be going out less and less over time simply because their supply of excess income to spend on things like eating out is shrinking.
The people that I know would make an inauguration party, adjust prices and renew the place and the offered products for a better fit with prospects.
And suddenly a failed place becomes a profitable business.
Did you miss this? These rural communities do not have the population density to support these businesses.
Have you ever been to these communities? There are literally only 2-3 restaurants in towns like these and that is basically all they can support.
Now, Wawas and Sheetz basically fill the gap for "eating out", but it is a very different business model needed to succeed in these places.
That doesn't apply to lending money to money-losing small businesses. There's no small chance of making a much larger return than what you lent. The risk is still high for such a loan, but without the possibility of a much greater return. The interest on that loan is what it is; it's not like you're buying ownership in a company like with typical VC equity.
Also, the principle I'm talking about, that of positive expected value, applies equally to equity and to loans.
The original quote from the article said that the business was profitable, just not profitable enough to justify the owner's investment. In other words, they need capital to scale in order to be profitable enough to justify the owner's time spent on the business.
It is only the poster who made the broad sweeping and wrong statement that small town businesses in general can't make money.
That statement has no empirical support whatsoever and is just an unfounded assumption, which you are repeating, and seem to be basing your thinking on.
Well put. But I also find wisdom in the expression "Banks will always be there for you when they need you. They will never be there for you when you need them."
The psychology of loss aversion dominates the behavior of lenders big and small. I've seen people I otherwise consider quite smart expect that they can convince holders of capital in various forms (from credit unions and community banks to the giants) to lend to solid small businesses unable to grow due to cash flow constraints.
As you point out, the VC world will place bets on expansion, but only with the prospect of exponential growth and exit. Banks increasingly seem uninterested in business lending at all, when they used to lend with the expectation of a reasonable but not extravagant return. I guess payment processing and retail fees are more lucrative and carry less downside risk - until the retail customers dry up and blow away because all the small businesses that used to use credit are gone. But I'll be retired by then, so who cares, right?
But that's not really how it is for a lot of places. If you have a history of a healthy profit after 3 years in business, you are more likely to be able to repay it. In the case of the restaurant, sometimes the improvements will make a difference but sometimes they won't. The bank is taking more risk at this point, and if things go sour, they lose.
Small businesses need working capital in the form of lines of credit to maintain cash flow as well as capital loans. Suppliers want cash in delivery or have short payment terms. Receivables don’t come in that way.
Small businesses often die due to cash flow problems, not fundamental business problems. The consolidation of banking is starving out small and medium business and reflects the decline of the overall American economy.
On the topic of cash flow: Let's pretend that you build houses. You are paid by your customers only after you finish each house. Before you can even start to build one of these homes, you must first buy and pay for the house's materials. If you don't have enough money to buy these materials, then you can no longer build houses for your customers.
This means that you would be in trouble if one of your customers doesn't pay you (i.e. a hypothetical real estate developer who dabbles in reality tv). In this situation, you have a couple of choices. You can decide to go out of business. Alternatively, you could try to find more money in the form of a loan or investment, which would allow you to rebuild your business and recover. If you don't have any way to get this money, your only choice is to close down.
That highlights the danger of centralization of finance. Some regional commercial banker at Bank of America or whatever doesn’t care about a small loan for a peanut processing facility. It’s not worth doing the paperwork to write that loan. The local banks did.
Local banks fold up mostly because of the ridiculous monetary policy where large banks get free money conjured up by the Fed.
Read “The Silicon Valley Way”. These types of issues are actually covered.
In the case of the small business, they were talking about a restaurant that had been open for three years. If such a restaurant isn't capable of sustaining itself at that point, it is quite certain a dire cause.
I know we are talking about a different scale here, but the idea that you must be in the black to get money simply isn't true. And if you are hold small town businesses to a different standard, then you just proved the point of the article.
Hmmm, the word "billionaire" seems to get thrown around a lot with those guys.
I'd say Twitter's profits are less of a problem than you think.
Businesses which turn a profit usually need loans and lines of credit. Regular income and expenses don't necessarily match, using an LC for a net 7 may be quite a bit cheaper than paying net 30 (and the other way around you may need your LC to wait for an incoming net 30 or worse), failing to expand or buy new hardware (which you don't have the cash on hand for) can kill the business, payroll may be touch and go some months when getting started, …
Avoiding loans is more likely to kill your business than help it. You obviously shouldn't go over your head, but loans are a normal way to operate and help a business get ahead.
exactly. the entire fn economy is designed to run on credit. every single corporation, no matter profitable or not, borrows money and maintains lines of credit as a part of the normal course of business, as do most individuals.
saying that you should be required to be in a city to use credit for your business is insane.
Most startups can't and won't turn a profit, so they shouldn't be getting loans and financing by that logic either.
Most startups burn money and aren't turning a profit, so they shouldn't be getting loans and financing by that logic either. What's so weird about a small business needed investment to expand to it can be more profitable?
Banks will not lend you the money, unless you already have the money. VCs will not bother with such paltry ROI.
They talk of cashing checks, and the end of the article makes clear that the peanut process business doesn't offer direct deposit to its employees. Having direct deposit isn't that complex compared to the rest of the business and would eliminate needing to drive long distances to deposit or cash checks.
Another thing, I'm a little surprised that the banks don't offer a drop safe w/ daily or weekly pickups even if they've eliminated a branch in a town. Much less expensive to install and maintain than an ATM, allows your business customers to drop off the cash each day.
To have a random drop box means you need to make sure it is at least as secure as an ATM - maybe more so. After all, businesses are losing their deposits, sometimes more than one if they only get it weekly. If it gets stolen, then what? Take the businesses' word for the deposit and give it to them or let the police handle it? For a small business, that could be catastrophic.
On top of that, the boxes will need collected at some point, which means an armored car trip out to some small country town.
By the time you are dealing with the theft thing and you are having an armored car daily or weekly anyway, it might be a little easier to just send the armored car to the businesses and let them take care of the security the other part of the day. As a bonus, some of the regional or national chains already have such systems in place in some stores (gas stations, pharmacies, fast food, and so on) so they will be pretty prepared already. The rest could have a drop safe installed on-site, probably renting it from the bank.
I'm sure people's increasing need for services regarding their balance/card leads them to choose larger financial companies over a local one. Wells Fargo is well known for fees, fees, fees but they have a solid customer base because you know your card will work in Iowa or DC or Morocco.
When people just needed a place to store cash, and could withdrawal it and travel local banks were fine. Needs have changed a little with the times. That reduces the lending pool too.
Probably fix the problem faster than Wells Fargo, that’s what they’d do. I’ve never even given thought to using the credit card from my Pacific Northwest credit union anywhere I like, and I have no reason to think otherwise. You’re worry about a problem I’ve seen no evidence of being an actual problem.
Paychecks... As a European I'm always suprised about how primitive the US financial system is.
When I worked in France we didn't have toilet seats. When I asked someone why not, they said the toilet seats would get stolen. They looked at me like I had just asked a really stupid question, like obviously people want to steal toilet seats. Even though theft was rampant (my coworker's comically shitty bike was stolen, and people warned me that anything not nailed down would disappear), I tried not to judge all of Europe based on this personal experience.