Attention Wal-Mart Shoppers: There’s a new deal for small businesses struggling to secure credit or loans.
Sam’s Club, the high-end division of Wal-Mart Stores Inc. is offering $5,000 to $25,000 loans, backed by the Small Business Administration, to small business owners. It’s a pilot program created for “members who really just need something to help them get by, as opposed to fully fund their business,” said Kristy Reed, public relations manager with Sam’s Club. “We did this more as a service because our business members were telling us access to capital was their biggest challenge.” Reed added, “Of course, they are already members of our club who shop with us, so we may see some of the dollars in return.”
Many banks have tightened their lending standards since the financial crisis began in 2007. Of the 47 million Sam’s Club U.S. members, Reed says 15 percent are business members who were denied a loan, according to a November survey. Business members, who pay a $35 annual membership fee, are the Club’s biggest customers. An estimated 600,000 small business members shop at Sam’s Club every day, Reed said.
Teaming up with private lender Superior Financial Group, the big box retailer launched the online program in four cities in May and expanded it nationally in July, saying it hopes to serve minorities, women and veteran-owned businesses. There is no immediate time limit for the pilot program.
Other retail stores, including Target, Toys “R” Us, Staples and Office Depot are also offering unconventional promotions to attract consumers, such as Target’s discounts to its credit card holders and Staples and Office Depot giving away certain products for a penny or at no cost, The New York Times reported.
Sam’s Club business members who apply online for a loan will receive $100 off the usual $350 or $450 application fee, depending on the amount borrowed, and pay a discounted 7.5 percent annual percentage rate (APR), which is similar to what banks offer small businesses. Depending on the applicant and credit score, the proceeds could be dispersed to the small business within a week. The loans are for up to 10 years and there is no penalty for early repayment. Approximately 300 business members have applied since the beginning of May, with a 49 percent approval rating, Reed said. Sam's Club makes $50 per funded loan.
The loan program isn't Wal-Mart's first attempt to offer financial products. In 2007, it tried to establish a bank, but dropped the bid after heated debate over whether the world's largest retailer should be allowed to gain the added financial power of a federally insured bank.
The new program comes on the heels of Congress’ efforts to pass a massive financial regulation bill aimed at, among other things, setting up an independent consumer protection bureau within the Federal Reserve to protect borrowers from lending abuses. The House approved a version of the bill last week, but it was temporarily derailed in the Senate when Scott Brown, R-Mass., objected to a new banking fee that would cover the $19 billion cost of implementing the bill. Small business is one of the growth engines of the U.S. economy, according to Sen. Kirsten Gillibrand, D-N.Y., who is sponsoring another bill that would eliminate capital gains taxes on small business investments and expand the deduction for startup expenses to encourage new entrepreneurs.
In 2009, 40 percent of small businesses received all or most of the credit they needed through banks, according to the National Federation of Independent Business (NFIB). That’s significantly lower than in the mid-2000s, when up to 90 percent had their most recent credit request approved. Banks have been reluctant to lend to small businesses, in part due to uncertainty about the economy and the new rules regulating Wall Street.
Banking experts say a decline in sales and the state of the economy, not access to capital, are the top challenges for small businesses. Consumers simply aren’t spending; there was just a 0.2 percent rise in consumer spending last month. “Spending has been improving a little bit but it’s growing from a very low number,” said Bill Dunkelberg, chief economist with the NFIB. “Retail sales have been positive but weak.”
“If you look at loan demand today, banks are making as many loans as they used to but businesses aren’t applying,” said Bob Seiwert, senior vice president with the American Banking Association. When small businesses did apply for loans, they often borrowed to provide needed cash flow due to sales problems.
Bankers are critical of the Sam’s Club program. Paul Merski, senior vice president of the Independent Community Bankers of America, says it sets a dangerous precedent for lending outside of the regulated banking industry. “You are jeopardizing the impartial allocation of credit,” Merski said. “It’s a dangerous mix of banking and commerce. That’s where we have gotten into trouble with the mortgage lending crisis.” Nonbank lenders, such as Superior Financial Group, aren’t subject to the same regulatory oversight as regular banks and wouldn’t be affected by the financial overhaul bill, he says.
Merski added that taxpayers also should be concerned because Small Business Administration-backed loans like the ones Sam’s Club is offering “come with a guarantee,” he said. “In the past there has been colossal fraud associated with nonbank lenders.”
Despite the banking industry’s concern about this unconventional method of offering loans, “it’s good to see more competition in the field,” NFIB’s Dunkelberg said. “At least it’s better now than a year or two ago.”