I came across this absurd news from Wall Street Journal yesterday about how small business owners are having problems getting financing from banks. To summarize, WSJ mentioned that many small business owners are denied loan applications for starting new business or business expansion. In some cases the business already had committed orders from customers and only needed money to ramp up production or hiring to start the work.
However, in almost all cases their applications were denied on the basis that they did not have sufficient cash flow to cover the payment. In the past, the business owners used to put business assets such as account receivables, inventory, equipments, etc. as collateral to get the loan. The valuation on these assets has declined in the recent downturn and is not sufficient to cover the loan payment.
So the banks are asking them to put cash as collateral in lieu of or in addition to the assets. Call me crazy; but if I had cash to put as collateral why would I go to the bank in the first place for loan? Does anyone else see problem with this convoluted logic or is it just me? Why would I put my money with the bank that earns tiny 1% return while I am paying more than 10% interest on loan? This is just plain ridiculous and is what is holding back the economic recovery in our country. This has to STOP!!! After all, if there is any hope of getting the economy back on track and reduce unemployment it is small business that is going to lead the way.
In the meantime, there are some creative ways small business owners can obtain financing for their needs. You can ask the customer for advance payment in return for discounts. You can also ask private lenders for cash in exchange for account receivables. Or just use your personal connections and credit cards to get access to cash. Admittedly, none of these solutions are pretty; but at least they can get you on track for the time being.
What has your experience been with the banks? How are you coping with this?
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