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Are Big Banks Really Helping Small Business?

Posted on by GoingConcern

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

In the latest move by a big bank to make itself into a friend to small business, Chase recently announced a program to offer incentives to small companies for hiring. But the actual benefit to most small businesses is hard to see.


Specifically, the bank will lower its interest rate on new lines of credit by 0.5 percentage points for each new hire, up to three employees, for the life of the loan. The offer is available to business owners who are approved for a line of credit of up to $250,000 or existing business customers who increase their line of credit by at least $10,000. And if you open a business checking account, you get an additional half percent discount on your loan rate.

A typical interest rate on a line of credit is 6 percent. According to the bank, if you choose the whole ball of wax – take the discount for three hires and open a checking account – you’ll lower that to 4 percent. And counting the discount for a new checking account, small business owners can save about $4,000 over three years on an outstanding balance of about $65,000.

Trouble is, that’s an offer most businesses are likely to refuse. Those already planning to hire and that are in good health might take advantage of the deal. In fact, they’d be silly not to. But the offer is hardly enough to inspire a business to hire if it wasn’t going to do so already.

What the offer might accomplish is to help Chase seem like a nice institution, not the greedy enterprise that helped bring down the economy. And it’s hardly the only attempt by Chase, or other banks, to do something to lift their image, something I’ve written about before. For example, last year, Chase unveiled plans to increasing lending to small businesses by $4 billion to a total of $10 billion. Bank of America recently said it would buy more from small businesses. In May, Citicorp launched a $200 million fund to boost small-business lending in low-income communities. And of course, last year, Goldman Sachs announced its own $500 million small-business fund.

It’s also a way to attract healthy businesses at a time when loan demand is down.

So a win-win for Chase. Not so much for small businesses.

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Automatic IRA Act Will Be a Boon for Financial Services Companies; Small Business…Not So Much

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

There’s pending legislation in the Senate to require even tiny businesses that don’t already have a retirement plan to create an IRA for employees. Whether or not it will do much to help people save for their retirement in a meaningful way is debatable.

The bill, the Automatic IRA Act of 2010, introduced by Senator Jeff Bingaman (D-New Mexico) mandates that businesses establish individual IRA accounts for all employees. Contributions would come from payroll deductions, so employers wouldn’t have to cough up any money themselves, and employees would be able to opt out. Accounts would be managed by banks, mutual funds, and insurance companies that already manage this type of account.


Also employers would have no ERISA fiduciary liability as long as they used a provider on a government-approved list. And there’s a default investment structure: a principal preservation fund for balances of less than $5,000 and a lifecycle fund for bigger accounts.

Seems reasonable, until you drill down further. First there’s the infinitesimal default deferral rate. That’s 3 percent. As a result, since employers aren’t even allowed a match, it’s unlikely employees will be able to save a whole lot. Also employers get a measly $250 tax credit to cover administrative costs.

Mostly this bill will be a potential goldmine for financial services companies, at least those on the official government list of approved providers. While each account will be small in aggregate, the amount will come to quite an attractive proposition for these businesses.

If there were any doubt about just what a windfall this could be, consider the provision for a gradual phase-in of the law. For example, in the first year, the bill will apply only to businesses with 100 or more employees. It won’t cover companies with less than 10 employees until year four.

But that provision wasn’t put there with the company owner in mind. Instead it’s all about the retirement services providers to help them “prepare for a significant expansion in the number of IRA accounts.”

To be sure, something needs to be done to boost the retirement savings rate in this country. With this bill, however, the real beneficiaries will be the usual suspects–big financial services companies.