It’s not surprising that taking on debt is out of vogue these days. What is surprising that it’s not just on the lender side; small businesses are shying away from loans as well. Is this because that debt is bad in uncertain times, or is there another reason?
The number of SBA’s number one secured loan, the 7(a) loan, dropped 30% since last fiscal year. An obvious reason is that lenders are less comfortable to give out money, even SBA backed money. Another is small businesses are finding it more and more difficult to navigate the loan process.
The SBA doesn’t actually give out the money, but rather backs a percentage of the loan. As a result, they only have guidelines when it comes to collateral and other terms needed to protect the lender. Small business owners are discovering that in order to get a loan these days, they must put up personal items as collateral; items such as their house, cars, or other property to cover the remaining risk.
Using homes as collateral is a long-time, tried-and-true method, but one that is no longer that effective. Because of the credit crunch, house values have plummeted making their usefulness as collateral shrink. This makes the small business owner less credit-worthy, and less likely to get a loan, or at least a manageable one.
