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Are the large banking institutions that currently dominate American finance the primary obstacle to small business credit in the current economy?
Despite government efforts to encourage small business lending among the major banking establishments, these large-scale financial institutions are curiously risk-averse in this important sector of the U.S. economy.
Despite promises from the major banks to loosen the purse strings for small business loans, most banks have significantly reduced their lending to smaller companies since 2009. Federal incentives have gone largely unnoticed by these banking institutions. Currently, 18 banks control approximately 60 percent of bank-held financial assets in the U.S.; these banks are responsible for only 27 percent of all small business loans, however. Smaller banks and credit unions make up a much larger share of the small business lending marketplace. Without the resources available to the top banks, however, these small financial institutions cannot make up the difference for small business lending needs.
While larger banks pay lip service to the idea of small business lender, actual small businesses are stuck in a holding pattern that limits growth and prevents expansion. A study conducted by the New York Stock Exchange and made public indicated that nearly half of all small business owners surveyed were unable to obtain needed funds through traditional banking arrangements. These figures indicate a systemic problem in the economy caused primarily by failures in the banking industry to support the small business sector adequately.
At the same time that lending to small businesses declined, many large banks were boasting that they were increasing the availability of small business loans and presenting financial reports to prove it. One strategy used by the major banking institutions was to categorize companies making $20 million in profit each year as small businesses. This deceptive technique allowed banks to show increased lending to smaller companies on paper without actually making more loans to these beleaguered smaller enterprises.
While banking institutions posture and federal efforts fail to have any real effect on the lending crisis facing small businesses, the economic costs of the tight credit market continue to add up in many areas of the U.S. Mitchell's article notes that regions with limited access to credit unions and smaller banks are paying the price as small businesses fail and unemployment figures rise. The long-term effects of these losses has yet to become evident; in the short term, however, the results are severely curtailed tax revenues for local and state governments and reduced opportunities for job seekers in these areas.
Some small businesses have turned to alternative sources of credit to weather the current unfavorable economic conditions. Asset-based lenders are becoming major players in providing loans to small businesses that otherwise could not obtain credit arrangements. These alternative lenders provide collateralized loans on financial instruments to include inventory and unpaid invoices. Because these loans are typically fully collateralized, they represent a much less risky investment for lenders. As a result, small business owners can usually qualify for these loans and obtain the credit they need to maintain current operations and to expand into new markets and new territories.
Alternative lenders typically offer a number of financing arrangements for their small business customers. Some of the most common loan types include the following:
• Accounts receivable financing arrangements that use the value of outstanding invoices as security for loans and lines of credit
• Purchase order financing for companies with long-term and established relationships with regular clients
• Asset based loans that use unsold inventory and stockpiles of raw materials as the collateral for short-term lending arrangements
These loans typically require much less paperwork than traditional lending arrangements. Additionally, because these loans are based on the value of the collateral rather than on the credit history of the borrower, the qualification criteria are much less strict than those employed by banking institutions. The flexibility provided by these loans can allow small businesses to manage their financial responsibilities more effectively.
Asset-based lenders like 1st Commercial Credit offer small business owners a viable alternative to traditional banking arrangements. 1st Commercial Credit specializes in delivering fast responses to loan applications and in rapid disbursements for approved loans. By opting for these alternatives to the modern banking industry, small businesses can obtain the credit they need to stay solvent in today's tight credit economy.
Other alternative financial companies referred to as Cash Flow Lenders are basing funding transactions on future receivable income that is changing the business lending industry at a very fast pace. These highly yielding loans are leaving business owners with very low margins and very high default ratios. It is only recommended for fast turning investments and should not be used as long term debt.