The Working Capital Guide

Small Business Loans

by Stephen A. Bush

Working capital financing and small business loans are producing mixed signals for borrowers. Business lenders are increasingly reducing or canceling commercial lines of credit, refusing to refinance commercial mortgages and turning down new requests for business financing. In contrast to their actual lending practices, most lenders have announced that they are lending normally to businesses. There are several economic and financial issues causing the mixed signals, but small business owners are likely to be confused in almost all cases.

From the perspective of lenders, it is probable that most banks want to be more actively providing small business loans than they currently can. However, many banks are under-capitalized and have been forced to increase their liquid assets to satisfy government standards. This need for more capital has forced a number of banks to both cancel some current loans and reduce their new loan activity. In other cases, lenders have depended excessively on short-term commercial financing sources and now find themselves short of capital to make loans because their own business funding sources are proving to be inadequate.

From the perspective of a small business owner, what matters at the end of the day is having sufficient cash flow and small business loan options to support the operational requirements of their business. The inability to borrow needed funds on an ongoing basis will quickly produce serious consequences for any business because very few businesses are debt-free. The average business owner probably does not understand why they cannot get adequate working capital or small business loans from their existing bank. However, once commercial borrowers realize that their current lenders might not be up to the task of helping their business, their primary mission is likely to involve locating new sources of capital.

Because there appears to be an adequate supply of new lending sources to fill the void left by the exit of many banks and other lenders from commercial lending, there is good news emerging from this confusing and complicated lending climate for small businesses. Recently a large business lender declared that they needed more capital from either the government or their current investors in order to continue a prominent role in making commercial loans to small businesses. Even though the failure of this lender would be inconvenient to businesses using their services, it has become clear that there are indeed other lending sources sufficient for solving the problem.

Business owners are in better shape than they probably realize to make it through the current business funding chaos despite mixed signals from lenders. But to ensure that their business survives, commercial borrowers should be prepared to take a more active and personal role in small business financing efforts.