Is It Fair That Banks Now Require More Initial Capital to Secure New Small Business Loans?

About a year ago, I had assisted someone in preparing a very solid business plan for their company. It was a unique company, offering a new innovation which was very specific to a certain industry. They needed more capital to buy more equipment and machinery, and hire a salesman, a marketing department, and a couple of engineers. They couldn't get the funding back then, but they kept refining their business plan. They called me up the other day and noted that they had been turned down once more time for a commercial loan for their small business.

The entrepreneur and his wife were complaining to me that the small business bank required more additional capital, more collateral, and wanted a higher interest rate to boot. The bank said it couldn't make the loan, or would not underwrite it, as it would be an SBA loan, unless they had more down, a stronger balance sheet, and more secured collateral. They still don't have it, and they cannot take their business to the next step until they get the loan, and they feel as if they're in a Catch-22, as their current cash flow can only sustain the business, and will not allow them to grow.

They suggested to me that it wasn't fair that the bank now requires even more initial capital to secure a new small business loan. Yes, I understand that complaint, however they must also realize that the reason we got into this terrible economic financial crisis is because mortgage brokers and banks were allowing people to buy homes with no money down, no way to repay them, and no proof or verification of a solid income or secured collateral. Right now, banks don't wish to take the risks, even though the SBA guarantees 90% of the loan, and as a taxpayer, I'd don't want the banks to take that risk either.

Many smaller banks are not in a very good position, and they are worried about being put on the watch list by the FDIC, as a possible bank which may be taken over by the government in the future. The last thing they wish to do is make business loans which may default. Hopefully you can understand their situation, and why they are reluctant to loan money even though they are a local small business community bank, or at least their advertising suggests. In any case, I hope you will please consider all this and think on it, and I hope you will also understand.