Small businesses seeking access to loans and credit are caught in a Catch 22. The Wall Street Journal writes that prior to the recession a mixed basket of collateral—property, equipment assets, personal guarantees, and cash—satisfied bank loan requirements. Now that property and equipment assets have fallen in value, small businesses are being asked to front more cash. Of course, if small business owners had cash they wouldn’t need to take out loans, particularly when banks ask for 100% of the loan’s value to be held in reserve, hence the Catch 22.
Because small businesses rely primarily on bank loans to expand operations and hire, the wider economy is trapped in a Catch 22 as well. Attorney Michael Webster writes that small businesses are typically the engine of job creation in a recovery, but tight credit has hurt hiring. Lenders who are uncertain about the strength of the recovery are hesitant to make loans to small businesses for fear of default if the economy regresses. Yet this very hesitancy and lack of lending is what is limiting job creation and wider economic growth, hence the second Catch 22.
Perhaps the Obama administration will be able to resolve the paradox with its proposed $30 billion small business lending program. Or perhaps alternative lending agreements such as promissory notes, credit cards, and micro-loans will fill the void.
If you are a small business owner in need of funding, visit Rocket Lawyer’s Free Business Finance Help Center. Tell us how tightened loan requirements have affected your small business in our comments section.