Small Businesses Getting a Cold Shoulder from Lenders

Small businesses are finding it hard to get loans as banks and lenders get cautious due to tightening credit situation.

Qualified borrowers on the other hand are getting reluctant to get fresh funding fearing over-extension amid the worsening financial crisis.

Needing Cash, Turning Down Cash

A clear case was presented by Mark Snyder, a medical supply business owner, who was turned down by his bank.  Snyder found a commercial lender willing to extend credit but at a staggering 30 percent interest rates.  

In another twist, a small factory owner in Chicago, Alan Petrucci, said his bank offered to fresh line of credit.  Petrucci said he will request for a loan not to expand his company but just to upgrade his machineries.

Mr. Petrucci emphasized that the country is going on a downward spiral and it is coming pretty fast.    The pessimism was not shared by Mark Snyder who has different views but his bank refused to extend fresh credit two week ago.  Snyder said he doesn’t want to bite the 30 percent interest rate offered by commercial lenders but they needed the money to boost sales.

Small businesses account for about 50 percent of U.S domestic output.  These are 27 million companies employing less than 500 people.  Most small businesses have 20 or fewer employees.

Small Businesses Are Scared

Small businesses are scared said Chad Moutray, the Small Business Administration’s chief economist.  Moutray said that small businesses are carefully reading developments and they either want fresh capital or they don’t want more capital.

As the economy turned for the worse and credit tightens, bigger companies tend to have more and easier access to the credit market than their smaller counterparts.  Small businesses rely heavily on banks, credit cards, and small loans to fund their ventures.  On the other hand, big businesses have longer and far more lucrative bank lines of credits and they can draw these down to solve their financial troubles.

Creditors however remains wary of companies they suspect having financial trouble but big corporations can overcome this by issuing commercial paper for short financing.  This enables big companies to sustain their funding but the interest rates for their credit lines would be higher.

Large and small businesses are now bracing for harder times and this is getting evident with the current decisions being made.  Companies are reducing their inventories and stock piles and buying only the materials they need.  On the other hand, banks have been active in encouraging businesses with good credit standing to get fresh loans.