Small Business Credit Crunch
Credit is essencial to running a business, especially a small business that can’t raise funds in a public offering. I have a $60k line of credit for my businesses that I use frequently in the operations of my businesses.
About two weeks ago I received a letter from my bank that stated they were lowering my line of credit from $60k to $50k. They said the reason for this reduction was “the stresses facing the economy.” As a customer, I was very upset - but, realizing that I typically only use about $20k, I let it go.
I’m hoping that with our current situation, I won’t regret the fight that I didn’t put up.
Federal Reserve Chairman Ben Bernanke spelled out the implications of this credit crisis earlier this week in front of Congress.
He talked of how small businesses would not be able to get the credit they need to operate, grow and hire workers.
“Credit is the mother’s milk of the modern economy. The tighter the credit spigot closes, the worse the economy is going to be,” said Mark Zandi, chief economist of Moody’s Economy.com. “Businesses operate on credit. If they can’t raise money, then very soon they won’t be making payroll.”
I am lucky enough to not absolutley need a lot of credit to opperate my businesses, most of them can function with little credit. However, most businesses are not that lucky and can put the rest of us in a bad position.
One of my worries about the current bailout plan is the fact the main beneficiaries have obligations to other nations.
But other experts say that credit was already tight before this month’s Wall Street meltdown and that pumping $700 billion into the banking system isn’t going to necessarily spur the economy.
Lakshman Achuthan, managing director of the Economic Cycle Research Institute, said the banks and Wall Street firms that will be the main beneficiaries of the bailout are going to take the money and prepare to deal with growing defaults in Europe and Asia as those economies slow.
He added that smaller banks will be more likely to repair their battered balance sheets than lend more aggressively.
If that is the case, then the credit crunch we are in won’t be solved by the proposed bailout and help the small businesses get the credit they need to keep payroll alive.
What do you think? What would be the best solution?
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