Southfield, Michigan (PressExposure) June 01, 2008 -- Small businesses are finding it more difficult to obtain financing and are the ones most adversely affected by the lending crunch because they are unable to obtain intermediate business lines of credit. Although the Fed has made concessions which include short term loans in the amount of $100 billion, small business owners have yet to benefit.
For the first time in decades credit is especially tight as the bursting of the housing bubble has spread misery across the financial system. Banks and investors become wary of lending funds to corporations, thereby driving up the price of debt products for borrowers.
Credit crunches are usually considered to be an extension of recessions. A credit crunch makes it nearly impossible for companies to borrow because lenders are scared of bankruptcies or defaults, which results in higher rates. The consequence is a prolonged recession (or slower recovery), which occurs as a result of the shrinking credit supply.
This credit crunch is unlike any other in the fact that banks actually have the money to lend but are scared to right very many loans. Banks are opting to play it safe by adhering to their strict requirements of a 680 credit score or higher and requesting tax returns for business lines of credit as low as $10,000. Before the credit crunch, it wasnât uncommon to obtain a business line of credit with a 620 and tax returns werenât required (except for lines over $50,000).
Doug Eddings, a 35-year-old small-business owner in Portland, OR, says three of his credit-card issuers all took steps in recent weeks to tighten his credit, either by raising his interest rate, halving his available credit or freezing his accounts. First, he received a notice from Chase in June notifying him that it was going to raise the interest rate on his Chase Amazon card to 29% from 17%. Soon after, another lender, HSBC Holdings PLC's HSBC North America, dropped his $5,000 credit line on his Best Buy store card to $2,105 -- just $5 above his current balance.
So what is a business in need of a loan to do? The best alternative in any market condition is to obtain trade lines of credit. Subsequently, trade lines of credit are the largest source of lending in the world, but the banks wonât tell you that. Trade credit is the extension of credit between two corporations. For instance, if you needed to buy a $10,000 copier, you could either obtain a line of credit from the bank and pay prime plus or go directly to the manufacture of the copy machine and ask them to sell you a copier on terms. In most cases, the terms are more favorable and the requirements are less stringent because trade creditors donât require personal guarantees (but they do require borrowers to be in compliance). Compliance is a set of standards that must be met to be considered a legitimate business. For more information about business lines of credit, trade lines of credit and compliance requirements and other topics like this, visit [http://www.iusecorporatecredit.com]