14 ms·

Decline of Rural Lending Crimps Small-Town Business

78 points by rumcajz 9y ago

dcroley 9y ago
Can't seem to find a non-paywalled version.
pnutjam 9y ago
non-paywall source: https://www.msn.com/en-us/money/smallbusiness/goodbye-george-bailey-decline-of-rural-lending-crimps-small-town-business/ar-BBHkUYm https://www.msn.com/en-us/money/smallbusiness/goodbye-george...
- dang 9y ago
  Thanks! Changed to that from https://www.wsj.com/articles/goodbye-george-bailey-decline-of-rural-lending-crimps-small-town-business-1514219515 https://www.wsj.com/articles/goodbye-george-bailey-decline-o....
rossdavidh 9y ago
Speaking as the spouse of an urban small-business owner (retail), I think the availability of lending is a mixed blessing. Every new small business needs to learn a few things about what works and what doesn't, before it will be successful (even when, perhaps especially when, they don't think they do). Getting a business loan at the very beginning of the business' life, means you spend all the money when you know the least. Starting lean with just money raised from family and friends means you have to iterate to bootstrap up, and this results in getting some learning before you get the money. Nobody thinks they need to, but I have (in a city) seen more small businesses sunk by their business loans than helped.
- maxxxxx 9y ago
  Raising money from friends and family is something I would not recommend. If the business fails you will have a lot of broken relationships unless the lenders have enough money to not care.
  - macintux 9y ago
    Dave Ramsey talks about personal lending and recommends that you treat it as a gift, not a loan, because it can be so destructive.
  - seanmcdirmid 9y ago
    It also only works if you come from a relatively rich family or have a rich social circle. Not everyone can tap that.
    - cannonedhamster 9y ago
      This right here is something way too few people understand. I basically had to unlearn a lot of bad habits from my family before I could get myself sorted and on a path to financial stability.
- thecolorblue 9y ago
  I definitely agree, even just looking at my past. I have had financial support for projects that went nowhere because I had no idea what I was doing. 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.
  - lumisota 9y ago
    > 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?
    - yeahsure 9y ago
      Any business will fail unless it allocates its resources responsibly. If banks don't, they'll go out of business (or get bailed out, but that's a different topic), if small businesses allocate money irresponsibly, they'll go out of business. With or without a loan.
      - rossdavidh 9y ago
        The priorities are different, though. The bank wants to maximize the amount of money that gets paid to them, you want to maximize the amount of money that gets paid to you. While the bank doesn't want you to go under, they also aren't necessarily thinking in your best interest either; getting your loan paid off and never needing another one is almost as bad a result for them as if you went under. This doesn't mean they're bad people, just that the incentives, while not fundamentally incompatible, are also not fully aligned.
qrbLPHiKpiux 9y ago
Too many businesses start with good intentions and not enough capital. I've seen those, in my industry, that think hanging a shingle is enough to generate a solid income. They over spend, Taj Mahal everything, and BK shortly thereafter.
geggam 9y ago
Maybe the bigger news is this... 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.
- saas_co_de 9y ago
  Since when is being able to turn a profit a prerequisite for getting loaned money here?
  - geggam 9y ago
    Evidently thinking someone should have a valid business model and a profit gets you downvotes... who knew ?
    - narag 9y ago
      A business can start losing money and later become profitable. Also banks tend to ask for something to pray in case that never happens, so they sometimes profit from unprofitable businesses. Happy New Year from Captain Obvious ;)
      - bunderbunder 9y ago
        A business can, but it's much more likely to be the case in something like software where the majority of costs are fixed, and economies of scale are such that you can relatively easily grow into profitability. 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.
kylehotchkiss 9y ago
I've generally gone online banks over local because I want things to work when I'm out of my hometown. What would "Bank of the James" for me if I'm stuck in England with a declined or broken card? 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.
- mikestew 9y ago
  What would "Bank of the James" for me if I'm stuck in England with a declined or broken card? 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.
  - arcbyte 9y ago
    With mobile banking and check depositing I agree, but ten years ago the availability of physical branches and my frequent travel as an out of state college student led me to choose BoA over local options. Today Im local only because the big banks have such terrible fees and policies.
cowsandmilk 9y ago
The article describes a real problem, but there are some items that make it obvious a little modernization could go a long way for a few of the businesses. 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.
- Broken_Hippo 9y ago
  I'm not surprised. 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.
Animats 9y ago
The US used to restrict branch banking across state lines. Before that, savings and loans were restricted from lending to projects more than some distance from an office, as they were expected to go out and look at construction. Now, the US has four big banks. 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.
- rileymat2 9y ago
  It is also unclear how much the big guys needed bailouts. http://archive.boston.com/business/articles/2009/05/15/first_nine_banks_were_forced_to_take_bailouts/ http://archive.boston.com/business/articles/2009/05/15/first...
- tomjen3 9y ago
  And by restricting how far away somebody can get credit you limit the market, which pushes prices up. 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.
  - SauciestGNU 9y ago
    I think you hit the nail in the head. Furthermore, instead of trying to limit movement to the cities, I think we ought to cut bait and stop subsidizing these dying areas and instead fund moving the people who live there to areas with sustainable economies. Small town rural America is never coming back, so instead of continuing to put good money after bad, we should look to innovative solutions that will help the people there, but might leave the actual locations abandoned or close to it.
    - deleted 9y ago
nikanj 9y ago
In general, we seem to have a growing problem funding traditional businesses, the ones that need X dollars in working capital, and return a healthy 5-15% on that capital per year. Banks will not lend you the money, unless you already have the money. VCs will not bother with such paltry ROI.
TomK32 9y ago
> Simple transactions require more planning. Employees must leave earlier to cash their paychecks, says Ms. Baker, who plans to add automatic deposit next year. Paychecks... As a European I'm always suprised about how primitive the US financial system is.
- Panino 9y ago
  I don't know any businesses that use paychecks in the US, though surely they exist - it's a big country. Be careful about how quick you are to judge an entire country based on what you read online, ok? (My company with a rural office does automatic deposit.) 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.
FiatLuxDave 9y ago
This decline of rural lending is causing a huge macroeconomic distortion, like a balance-of-payments issue. A dollar is a dollar, but it is quite apparent that the value of a dollar is different between rural Mississippi and urban Manhattan. There has to be a way of gaining from that difference. I feel like we are staring at the largest arbitrage opportunity in history and doing nothing. 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?
- woolvalley 9y ago
  It's probably no arbitrage if it doesn't get 'fixed' for many years. TBH it's going in the opposite direction, from 2nd or 3rd tier cities into the 1st tier cities.
- passthefist 9y ago
  It's totally different but I think Dollar General is benefiting from a similar play. 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?
- zeusk 9y ago
  > Of course, you can work remotely in San Jose and live in Wyoming, but this doesn't scale. Well, that does scale. Which is why you have TCS, Infosys, Accenture et al.

78 points by rumcajz 9y ago

Can't seem to find a non-paywalled version.

non-paywall source: https://www.msn.com/en-us/money/smallbusiness/goodbye-george-bailey-decline-of-rural-lending-crimps-small-town-business/ar-BBHkUYm https://www.msn.com/en-us/money/smallbusiness/goodbye-george...

dang 9y ago
Thanks! Changed to that from https://www.wsj.com/articles/goodbye-george-bailey-decline-of-rural-lending-crimps-small-town-business-1514219515 https://www.wsj.com/articles/goodbye-george-bailey-decline-o....

rossdavidh 9y ago

Speaking as the spouse of an urban small-business owner (retail), I think the availability of lending is a mixed blessing. Every new small business needs to learn a few things about what works and what doesn't, before it will be successful (even when, perhaps especially when, they don't think they do). Getting a business loan at the very beginning of the business' life, means you spend all the money when you know the least. Starting lean with just money raised from family and friends means you have to iterate to bootstrap up, and this results in getting some learning before you get the money. Nobody thinks they need to, but I have (in a city) seen more small businesses sunk by their business loans than helped.

maxxxxx 9y ago
Raising money from friends and family is something I would not recommend. If the business fails you will have a lot of broken relationships unless the lenders have enough money to not care.
- macintux 9y ago
  Dave Ramsey talks about personal lending and recommends that you treat it as a gift, not a loan, because it can be so destructive.
- seanmcdirmid 9y ago
  It also only works if you come from a relatively rich family or have a rich social circle. Not everyone can tap that.
  - cannonedhamster 9y ago
    This right here is something way too few people understand. I basically had to unlearn a lot of bad habits from my family before I could get myself sorted and on a path to financial stability.
thecolorblue 9y ago
I definitely agree, even just looking at my past. I have had financial support for projects that went nowhere because I had no idea what I was doing. 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.
- lumisota 9y ago
  > 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?
  - yeahsure 9y ago
    Any business will fail unless it allocates its resources responsibly. If banks don't, they'll go out of business (or get bailed out, but that's a different topic), if small businesses allocate money irresponsibly, they'll go out of business. With or without a loan.
    - rossdavidh 9y ago
      The priorities are different, though. The bank wants to maximize the amount of money that gets paid to them, you want to maximize the amount of money that gets paid to you. While the bank doesn't want you to go under, they also aren't necessarily thinking in your best interest either; getting your loan paid off and never needing another one is almost as bad a result for them as if you went under. This doesn't mean they're bad people, just that the incentives, while not fundamentally incompatible, are also not fully aligned.

qrbLPHiKpiux 9y ago

Too many businesses start with good intentions and not enough capital. I've seen those, in my industry, that think hanging a shingle is enough to generate a solid income. They over spend, Taj Mahal everything, and BK shortly thereafter.

geggam 9y ago

Maybe the bigger news is this... 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.

saas_co_de 9y ago
Since when is being able to turn a profit a prerequisite for getting loaned money here?
- geggam 9y ago
  Evidently thinking someone should have a valid business model and a profit gets you downvotes... who knew ?
  - narag 9y ago
    A business can start losing money and later become profitable. Also banks tend to ask for something to pray in case that never happens, so they sometimes profit from unprofitable businesses. Happy New Year from Captain Obvious ;)
    - bunderbunder 9y ago
      A business can, but it's much more likely to be the case in something like software where the majority of costs are fixed, and economies of scale are such that you can relatively easily grow into profitability. 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.

kylehotchkiss 9y ago

I've generally gone online banks over local because I want things to work when I'm out of my hometown. What would "Bank of the James" for me if I'm stuck in England with a declined or broken card? 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.

mikestew 9y ago
What would "Bank of the James" for me if I'm stuck in England with a declined or broken card? 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.
- arcbyte 9y ago
  With mobile banking and check depositing I agree, but ten years ago the availability of physical branches and my frequent travel as an out of state college student led me to choose BoA over local options. Today Im local only because the big banks have such terrible fees and policies.

cowsandmilk 9y ago

The article describes a real problem, but there are some items that make it obvious a little modernization could go a long way for a few of the businesses. 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.

Broken_Hippo 9y ago
I'm not surprised. 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.

Animats 9y ago

The US used to restrict branch banking across state lines. Before that, savings and loans were restricted from lending to projects more than some distance from an office, as they were expected to go out and look at construction. Now, the US has four big banks. 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.

rileymat2 9y ago
It is also unclear how much the big guys needed bailouts. http://archive.boston.com/business/articles/2009/05/15/first_nine_banks_were_forced_to_take_bailouts/ http://archive.boston.com/business/articles/2009/05/15/first...
tomjen3 9y ago
And by restricting how far away somebody can get credit you limit the market, which pushes prices up. 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.
- SauciestGNU 9y ago
  I think you hit the nail in the head. Furthermore, instead of trying to limit movement to the cities, I think we ought to cut bait and stop subsidizing these dying areas and instead fund moving the people who live there to areas with sustainable economies. Small town rural America is never coming back, so instead of continuing to put good money after bad, we should look to innovative solutions that will help the people there, but might leave the actual locations abandoned or close to it.
  - deleted 9y ago

nikanj 9y ago

In general, we seem to have a growing problem funding traditional businesses, the ones that need X dollars in working capital, and return a healthy 5-15% on that capital per year. Banks will not lend you the money, unless you already have the money. VCs will not bother with such paltry ROI.

TomK32 9y ago

> Simple transactions require more planning. Employees must leave earlier to cash their paychecks, says Ms. Baker, who plans to add automatic deposit next year. Paychecks... As a European I'm always suprised about how primitive the US financial system is.

Panino 9y ago
I don't know any businesses that use paychecks in the US, though surely they exist - it's a big country. Be careful about how quick you are to judge an entire country based on what you read online, ok? (My company with a rural office does automatic deposit.) 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.

FiatLuxDave 9y ago

This decline of rural lending is causing a huge macroeconomic distortion, like a balance-of-payments issue. A dollar is a dollar, but it is quite apparent that the value of a dollar is different between rural Mississippi and urban Manhattan. There has to be a way of gaining from that difference. I feel like we are staring at the largest arbitrage opportunity in history and doing nothing. 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?

woolvalley 9y ago
It's probably no arbitrage if it doesn't get 'fixed' for many years. TBH it's going in the opposite direction, from 2nd or 3rd tier cities into the 1st tier cities.
passthefist 9y ago
It's totally different but I think Dollar General is benefiting from a similar play. 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?
zeusk 9y ago
> Of course, you can work remotely in San Jose and live in Wyoming, but this doesn't scale. Well, that does scale. Which is why you have TCS, Infosys, Accenture et al.