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Lenders in financial trouble: Will small business loans dry up?
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| Yes | 57% | 56 votes | Total: 98 votes | |
| No | 43% | 42 votes |
Yes
by Tom Calhoun
Created on: April 21, 2009 Last Updated: April 23, 2009
This is nothing new back in the 70s when things got tough the banks did the same thing as they are doing today. The difference was the government was not bailing them out, and the drying up of small business loans where real. The money just was not there as people were getting laid off, and taking money from their savings banks tightened up their loan lending practices.
What we have today is more a greed thing. The big money people have been on such a high for so long that bonuses have become an expectation. This being the case millions of dollars are being spent to pay for those bonuses. The monies available for loans have pretty much dwindled. For a small business person to get a loan today to start a business it seems they need as much in the bank as they want to borrow. The other factor involved here is bad loans given to those seeking the American dream, but not really being able to afford it. It really does not matter who is responsible for such lending practices be it the government or the banks themselves. The point is they have taken such a hit that lending to anyone at this point seems less than desirable to the banks.
Small business loans have always been hard to acquire and the reason for this is that most people trying to start a business finds its a bit demanding applying for such loans and not experienced enough to fill out the paper work. Because of this these entrepreneurs will do one of two things, give up on the loan process and try to find their own financing some place else, or use their own money to start the business putting themselves and their families at risk.
Even when times are good small business loans are not the easiest to obtain because of the hoops one has to go through to gain such a loan. If lenders are truly in trouble, and it would seem there is no doubt about that, small business loans as we know it will indeed dry up. Having said that in the light of the current situation I believe small business loans have pretty much dried up already.
However the good news is this current situation will not last forever, and as we come out of this recession, as they put it the hope is things will get better, small business loans will be easier to obtain and the economy will again begin to grow and gain momentum. Hopefully everyone will learn from this experience and understand that small business is truly the backbone of this country, and never let this sort of thing happen again. However history does tend to repeat itself as we are seeing today.
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No
by William Remski
Created on: November 05, 2010 Last Updated: November 07, 2010
Banks and other lending institutions make money on loans. The current financial crisis is a result of bad loans made by banks. These bad loans were made as a result of greed, and because it was thought that property values would only go up. The financial crisis was not caused by business loans. There is still a lot of money in the system, but it will be harder to get a loan as banks will tend to be more selective with whom they will lend funds.
It is not easy to get a business loan from a bank. If your business does not have a history of making a profit for several years, no bank will want to make you a loan. Unless you have cash or property for collateral, or can show your business is making money, you will not get a loan. The bank wants to know that it will make a profit on any loan it makes. They want to know if you will pay back the loan even if your business fails. A bank will want to see you risking your own money on your business. The bank does not want to see a 300 page business plan if you haven't made a single sale.
Banks are in a simple business. People deposit money in a bank account. This is in effect a loan to the bank. In return the bank pays a small amount of interest. The bank then takes this deposited money and loans it out at a higher interest rate to people who need money to buy a house or run a business. Most banks do not make business loans, as they know business loans are risky. The bank wants to hedge against loss, so they will make a mortgage loan, as the value of the property will revert to them in the case of a default. Banks also know that four out of five businesses fail in the first five years. These are not good odds for an investment.
If you want to secure a bank loan for your small business, you will have to put yourself in the bank's place. The bank is not loaning you, it's own money. The bank loans out money it has borrowed from depositors. If you default on your loan, the bank still owes these funds to its depositors. The bank is also responsible to it's investors, as it has to turn a profit or the investors will pull out. A loan officer who makes bad loans will not have a job for long. If you have a business that is making money and that is not burning cash on pointless expenses, you will be more likely to secure a loan. If you are just starting up with no sales and no realistic projections, nobody is going to give you a dime.
The current financial crisis has not changed the fundamentals of banking. Banks still borrow money from depositors and lend it out at a profit. What the crisis has done is cause changes in the way loans are approved. No longer will a bank loan you money based on projected increases in the value of your property. The bank will not approve a loan if you don't have the income to make the payments on that loan. If you want a bank loan for your business you will have to show that you can repay the loan even if your business fails. When seeking a business loan, a bank will look at your total assets and net worth to determine whether they will make you a loan. If you are not of good character with a record of repaying loans it is unlikely the bank will offer you any funds, even if you have cash for collateral.
Learn more about this author, William Remski.
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