Where Did All the Credit Go?

In some ways small business owners and entrepreneurs have been relegated to orphan status since the collapse of the economy in 2008. Despite their collective importance to our economic well being, policy makers did little or nothing to include them in the bailout. Even though their combined value outdistanced Wall Street firms in terms of stability, growth and jobs, that fact alone was not enough for admission into the inner circle.nnThe first multi-billion dollar bailout focused on Wall Street's Big Boys. The AIGs, the Citibanks and the Goldman Sachs were all deemed too big and too important to undo their own mess. They clearly were not ready to act responsibly and make the necessary adjustments. Self correction is just not their thing. Turns out that Wall Streeters have a far greater sense of entitlement than the much criticized folks on the low end of the totem pole.nnLeft in the lurch in all this were small business owners. They could no longer depend on the unsecured loans and unsecured credit that traditionally enabled them to maintain their cash flow. The ripple effect of the credit squeeze radiated out with alarming consequences. Unsecured business loans were the ideal vehicle for small businesses with temporary cash flow credit needs.nnUnsecured loans were relatively easy to get. They did not put business assets at risk. They provided the necessary cash flow for stability and growth. Loan and credit line approvals were quickly granted because the process itself remained unclogged by bureaucratic hoops. And the repayment time could be extended out as far as 60 months.nnWhile unsecured debt and credit lines, at first glance, might appear to be a risky venture for lending institutions, in fact just the opposite is true. While business owners and entrepreneurs did not have to provide collateral for these loans, a good chunk of the loan amount was guaranteed. That is a big part of the reason why unsecured loans and credit lines were so efficient.nnThe Small Business Administration (SBA) guaranteed 85 percent of the loan value. For lending institutions and the economy in general, it was a win-win situation. Lenders knew that if push came to shove and the worst happened, they would get back 85 percent of the failed loan. The remaining 15 percent might seem like a great deal of money at risk when considered collectively, but small business unsecured loans and lines of credit are individual entities.nnUnlike the Wall Street conglomerates, a failed small business loan does not mean billions of dollars at risk along with thousands of job losses. Unsecured small business loans generally range between $50,000 and $500,000. Jobs at risk from failed businesses are more likely to count below 100 than in the thousands. And, when all is said and done, the track records of unsecured business loan holders is very good.nnFor all of those reasons it makes sense that the initial bailout should have directed at least a portion of the funding specifically for unsecured business loans and lines of credit. Delaying attention to the cash flow problems of Main Street businesses has resulted in time and jobs lost. The administration that was sworn in in January 2009 has tried to ameliorate the situation by making credit more available.nnWhereas the first bailout made no demands on how financial institutions would use the billions of dollars that fell into their laps, the second bailout has tried to rectify that. Financial institutions accepting bailout money are required to publicly account for how the funds are being used. They must also report monthly on funds made available to small business owners for unsecured loans and credit lines. In addition, such loans are even more risk adverse. The SBA guarantee has been increased from 85 percent to 90 percent, making it even more attractive to free up credit.nnThose seeking unsecured loans and lines of credit should find it easier to do so. Bailout money is still unavailable directly to small businesses. But because the government is now requiring that Wall Street hot shots put on their big boy pants and become the solution rather than the problem, unsecured loans and unsecured credit is beginning to filter down as it should.