The economy has made some major shifts in recent years, and there are probably more changes to come. What can we expect from the near-term and long-term financial future? What can we expect the face of business loans to look like in the new economy? We’ll discuss that a bit, in today’s article.
Business loans are getting harder and harder to obtain from private capital markets—this is no surprise. With huge swatches of investment portfolios showing themselves to be toxic, there is a strong movement towards increasing restrictions on new borrowers. This, coupled with the systemic damage to credit scores across many small companies, has made obtaining business loans almost impossible for many potential and existing companies.
So, how are we dealing with this problem now? How will we continue to do so in the future? At the moment, subsidizing lenders through loan guarantee programs, such as those done by the SBA and others funded through stimulus funding, is opening up much of the market. This may work in the short term, but many people believe this is simply kicking the can down the road when we should be cleaning up.
One suggested long-term solution is to break up the larger banks. However, this, too, doesn’t really resolve the issues with business loans. In fact, smaller banks have a much lower tolerance for defaults because they are smaller and cannot soak up the losses as easily. What this means is that a group of smaller banks would be even less likely to give out funding to newer ventures and small businesses. So, what is the answer? Nobody knows for sure.