While banks continue to hoard money, small businesses turn to private lenders

Private money lenders are experiencing an increase in small business lending. They are filling the void left by the banks tightening lending standards and refusing to lend money.

While President Obama has repeatedly called upon banks to lend money to small businesses, those calls have gone ignored.

Small business owners are turning to private lenders as they need cash to pay employees, purchase inventory, buy equipment for expansion and make their mortgage payments. Small business owners are left with very few options except private lenders.

The private lenders have always existed but usually for those with less than perfect credit that could not qualify for traditional loans. Now, with the credit crunch, more small business owners are being declined for loans and lines of credit they would normally be able to get.

The private lenders provide a much needed financial service; however these types of loans come with annual rates from 7% up to 36%, plus fees.

Under the umbrella of private lenders are hard money loans. Hard money lenders require collateral such as personal property, future receipts (anticipated revenue) or the business itself. It is a dangerous line to cross for small business owners as they could very well end up losing everything.

Senate Republicans, once again, are playing politics with small business owners’ livelihood. There are several measures on the table currently in the Senate. One measure is aimed at restoring funding to a Small Business Administration loan guarantee program.

Another measure would set up a $30-billion fund to encourage community banks to make small business loans. Small business owners who hire workers could also get new tax credits. Senate Democrats have been unsuccessful in breaking a Republican filibuster on the bill.

While negotiations continue, small business owners, as a last resort, have turned to private high cost lenders. SBA chief, Karen Mills, said “This is of real concern to us,” …”This credit crisis has really hit small businesses who have to rely on banks – and banks have pulled back.” (Los Angeles Times, Sharon Bernstein).

 

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