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The end of last week Charles Green published a piece about a recent study conducted by the San Francisco Federal Reserve. “Business loans may be more available, but they are not offered at terms that are considered cheap,” said Simon Kwan, vice president of the San Francisco Fed’s economic research department.
If you’re a small business owner and have been in search of a small business loan, this isn’t really news to you—particularly if you’re one of the smaller small businesses. Despite the fact Green so ably points out that the Prime Rate fell 5.25 percent in 2007-2008, “…the spread of the commercial loan interest rates over the target federal funds rate remains above its long-run average,” says Kwan. He concludes, “…business loans are not yet cheap relative to banks’ funding costs.”
In other words, despite the fact the Prime Rate hasn’t changed since it dropped 5.25 percent about seven years ago, the spread (interest rate) bankers charge isn’t passing that savings on to their small business borrowers. What’s more, since the lion’s share (some estimate only 10 percent of small business borrowers are successful at the bank) of borrowers don’t wind up with the financing they need from the bank and end up with non-bank, alternative financing, capital for small business owners is very, very expensive.
What does this mean? Small business owners need to become much more savvy about how they finance growth. Unless your business is wildly profitable, you have great collateral, and your credit score is above reproach, it’s unlikely you’ll have much luck at the bank and you’ll need to approach what my friend Mr. Green calls “Innovative Lenders” from a different paradigm.
Expensive doesn’t necessarily mean bad. It does mean you need to know what you’re doing and what you’re getting into.
The implications of the San Francisco Fed’s report are significant, as Mr. Green describes in his piece. Nevertheless, I’m convinced the biggest take-away is that small business owners need to spend time educating themselves so that when they’re sitting across the desk or on the other end of a phone call with a lender, they know exactly what they want, they know exactly what they need, and they know what the financial status of their business is so they can make the best deal possible for their business. Otherwise, more and more businesses will likely be borrowing their way out of business as the cost of capital rises.
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Small business evangelist and veteran of over 30 years in the trenches of Main Street business, Ty makes small business financing and trends accessible in common sense language devoid of the jargon.
Blog
7 min read • Aug 08, 2022