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    Banks and credit to small businesses

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    Many small business owners may claim that banks will only loan them money when they don't need it. The reason for this may lie in the fact that many small businesses are perceived as high-risk entities; an argument that owners of such companies will fully reject. In a paragraph or two, elaborate on claims like these made by small business owners. Are banks right in not extending credit to small businesses? Don't small businesses need a break, too? Discuss your reasoning regarding these issues in 1 to 2 paragraphs.

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    Solution Preview

    Use has been made of material at
    www.federalreserve.gov/ boarddocs/rptcongress/sbc_rep.pdf

    The problems the small businesses face are:
    1) As a result of the mergers there is a shift of decision-making authority away from local branches to remote loan processing centers. Many bank officers don't have the authority to make the decision to approve a loan. The chances of getting a loan are seriously diminished if the decision maker hasn't personally talked with the entrepreneur, can't assess the impact the proposed new business will have on a community, and can't look at the big picture to see how lending capital to one small business could create a ripple effect of goodwill and new business for the bank.
    2) Even if a small business is repaying a loan in a timely manner, it can receive a high-risk rating because the definition of a "bad risk" is now based on the overall picture of a company gleaned from annual financial statements, which might show ...

    Solution Summary

    The solution answers the question: Are banks right in not extending credit to small businesses?