Today’s Economic Environment and the Credit Markets
Over the past six months, more and
more small and medium sized business owners and startup entrepreneurs have come
to TheFinanceResource.com with the same question: Are banks still lending and can
I still obtain credit/investor financing given today’s economic environment? In
short, the answer is YES.
First, of course, the legal disclaimer
Please note that the information
in this article is not to be used as consulting, accounting, or legal advice. The
following information is provided with the understanding that this article is not
a substitute for professional advice, and is merely for informational purposes.
TheFinanceResource.com is not responsible for the use of any information contained
below or for the factual accuracy of any statements made below.
It is extremely important to note
that banks are in the business of lending money. Banks earn income from loans in
two different ways. First, they earn income from the closing of the loan, which
often involves upfront fees (or points). Second, they earn an interest rate spread
on the amount of interest you pay to the bank minus the interest they pay to their
depositors. Banks are in the business of lending money, and despite the current
economic climate, many small business owners and entrepreneurs are obtaining the
capital they need to start and expand their businesses.
One of the most important things
to keep in mind is that SBA loans and other small business lending programs are
backed by the
federal government. As such, banks actively seek to finance these projects as Uncle
Sam provides an 85% guarantee to the bank on the principal amount of the loan (in
most instances). As such, the risk for the SBA lending bank is minimal as in the
event of a loan default, they are substantially reimbursed for their loss.
Without a doubt, all of us have
concerns about the economy. There has not been a day over the last year where concerns
regarding rising energy costs, inflation, falling housing prices, and the issues
relating to the credit markets have not been addressed by the news and our elected
officials. Recently, Congress and the President enacted a law that will provide
the banking system with $700 billion of loan purchases so that banks and finance
companies can resume normal business operations. Within two weeks, the passing of
this law has allowed many important lending rates to fall, and although it will
take time to fully come into fruition; this law will ease the issues regarding the
credit markets both domestically and internationally.