The Negative Effect of National Debt on Small Businesses

The Negative Effect of National Debt on Small Businesses
The Negative Effect of National Debt on Small Businesses
June 1, 2016

A small business is regarded as one with less than twenty workers and a high percentage of them are non-governmental organizations. Small businesses looking to expand always face one reoccurring problem which in this case is getting loans to make the vision a reality. The main problem which makes it difficult for small businesses to get loans is because of the high risk associated with them.

Are banks lending at all?

Besides the high risk, the other salient reason why this venture looks almost impossible is because of the national debt crisis. Commercial banks usually get their loans at a low or near zero interest and give this loans back to the government at a high interest rate.

Read also: Merits and Demerits of Purchase Money and Non-purchase Money Loans in Short Sales

It might interest you to note that the United States government also borrow money to finance the affairs of the State (this is not peculiar to the United States government but to virtually all – if not all – government around the globe). So, the answer is obvious. Commercial banks are lending hugely, but not to small businesses.

Banks prefer to lend to the government to earn more money

Although the United States economy is run by small businesses, the answer to the reason why banks would prefer to lend to government rather than the driving forces of the nation’s economy is so glaring – banks are also out to make profit.

Read also: A Cash Business Loan might Just be Perfect for a Working Capital

Not only will lending to the government guarantee them huge profit, there is also the reduced risk of non-payment of acquired loan which is rampant with the small businesses. Banks do not also get incentives for their effort in growing the small businesses and when they do lend to small businesses, they have to do so at a reduced interest – so what’s the fuzz?

Businesses that can easily access loans

To every rule there is always an exception and in this case, real estate appears to be an exception to this rule of non-lending by banks to small businesses. Normally, a real estate owner hoping to but a property worth say a million dollar will need to put down like twenty five percent of the payment.

Read also: What You Never Knew about the Small Business Administration Loans

However, there is a new program called the CDC/504 program which allows the real estate owner to put down only a paltry ten percent while the government spreads out the payment. Now, banks love this program so much and would gladly lend their money. Why? Because there is collateral which they can liquidate to get back their money in the event of failure by the borrower to repay the loan.

Who will bell the cat?

Naturally, the awkward bank policy would have dealt a great blow to small businesses and possibly brought an end to that name – small businesses – but on the contrary, if you look around, you will discover that small businesses are flourishing. What could be the reason?

The reason is simply because of the intervention of investors who are now willing to stake their money into small businesses. The bitter part of the story is that small businesses are given one of two options to choose from; either they pay huge profit to the investor or they give up ownership of a reasonable amount of their businesses to the investor.

Read also: Looking for Ways to Finance Your Company: Try Asset Based Lending

Article highlights

  • Assessing loans as a small business is getting increasingly difficult.
  • Commercial banks are willing to lend to the government rather than small businesses.
  • The risk associated with small businesses is too high.
  • Many governments around the world borrow to run national affairs.
  • A small business is regarded as one with less than 20 workers.
  • Banks easily lend to government because they are confident they’ll pay back.
  • The 504 program makes it easy for real estate owners to borrow money.
  • Investors are filling the gap of commercial banks in lending to small businesses.
  • Small businesses drive the economy of the United States
  • Small businesses are losing their business ownership and control to investors.

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