Small Business Credit Crunch: How to Secure Financing Despite Widespread Tightening of Lending Standards

I've blogged before about how the government tends to focus on tight credit conditions for small business lending, often overlooking the need for a new paradigm for banking. Especially after the recent debacle in the credit markets, small business lending needs to be focused more than ever on solutions that best serve borrowers' needs.

However, what is normal in terms of lending has also become distorted. Thus the "credit crunch" we are seeing is often a result of loose credit not being available anymore, along with distorted expectations of the lending market. Perspectives tend to be skewed because of the lending bubble we saw a few years ago where there was an anomaly of banks often offering credit that wasn’t focused on earnings.

Companies feeling the Squeeze as a Result of Small Business Credit Crunch or Unrealistic Borrowing Expectations?

With bank lending, we got into trouble when the focus was on credit ratings and asset values, not the ability to make debt service. Once again cash flow is now king and the challenge for many businesses isn’t so much a “credit crunch” – the real problem is that people need to reset their expectations to long-term realistic lending standards. People need to look closely at the criteria to get a loan.

Now banks are returning to more prudent small business lending practices – based on realistic asset value and ability to repay the debt on both a historical and ongoing basis, with conservative estimates of forward projections.

Meanwhile, alternative lenders have always been focused primarily on assets. Rates may be slightly higher depending on credit risk, but these are lenders that are active and readily available to businesses. Banks have abandoned this risky region because they are often not as specialized or experienced, whereas experts in this area were not hurt during downturn and are still actively lending.

The reality is that you just can’t borrow cheap money with no assets and no history anymore, which is why we need to reset our skewed expectations to a normal credit market. Businesses have been a little slow to get their heads around this – but it’s very similar to the bubble burst in the housing market where we’ve had to firmly reset our expectations of the residential real estate market borrowing possibilities.

How Access to Credit Affects the Economic Recovery

I often get asked my thoughts on how access to capital affects economic recovery, and I tend to disagree when people say that the more difficult credit is to obtain, the slower economic recovery will be. In fact, making loans that don’t make sense can lead to more economic instability in the long run. Having realistic access to credit and a better underwriting standard is the best thing for recovery in both the short and long run.

This helps create stability – and stability is the thing that economies are built on. This means that our lending expectations need to change and be reset to more historical standards. Businesses who aren’t a good fit for marquee lenders need to look outside the bankable box to private banks and alternative lenders who are more advisory-oriented and can help businesses secure financing for appropriate working and growth capital that is both intelligently structured and affordable.

If you would like to know more about how your business can secure the funding it needs, visit US Capital Partners, Inc. at or call (415) 882-7160.