The financial crisis has led banks struggle to maintain their breakeven, leave alone the profit margins. This led to hesitation in the case of lending to small businesses or merchant cash advances. Banks find small businesses less credit worthy due to recession. Banks have become risk averse because of increased regulations and legislations. The small community based banks have consolidated into strong big banks.
All these are the major obstacles a small business faces while approaching banks for cash advances or loans. The Federal Reserve data points the general income of the typical household has decreased of the last few years and so has the collaterals owned by the small businesses. The net effect is lower credit scores for the loan seekers.
The loans distributed to the small businesses are risky because of its dependency on the overall economic environment. The increased regulations have worsened the conditions for small business loans. Though the governments carry out their policies flavoring the small businesses, but on ground nothing seems to change.
The banks are becoming cautious and raising the capital reserves, increasing deposits and holdings. They are doing everything to protect their liquidity ratios, and decreasing loan segments for small businesses. Even if banks underwrite loans or cash advances, the transaction costs levied are too high without any guarantee to loan processing. The banks have stopped loans for the smaller amounts; a common feature of small business loans. This leads to a gap in the demand and supply of the small business loan market.
Until recent community, banks played a key role in lending to small businesses, but the number of banks has reduced considerably owning to mergers and amalgamations. The options available to small loans have decreased drastically.
The product of these situations is the frustrated small business owner, who wanders from place to place to approve his loan application. The technology acts as a facilitator both for lenders and for borrowers with respect to risk and transaction costs. The experts recommend small businesses to develop a strong, mutually beneficial relation with lenders; wherein they can seek loans and build credibility in long run.
No comments:
Post a Comment