Commercial Bank Financing And Small Business Debt Reductions

Commercial Bank Financing And Small Business Debt Reductions

Because of serious deficiencies with commercial banking services for small business owners, a prudent and logical response for business borrowers is to investigate the viable options for reducing their dependency on commercial debt and small business bank financing. A growing number of business owners are seeking business consulting advice about how to reduce commercial bank financing and small business debt.

In most cases, small business owners are not openly seeking a commercial lending struggle with their bank. It is a practical outcome to the increasing inability of banks and other business lenders to provide adequate amounts of working capital financing and business loans. It seems likely that most business owners have probably viewed their business banking relationships on a loyal and friendly basis over the years. Now as with many other business practices, massive changes are literally forcing small businesses to examine and revise their business financing strategies.

Evaluating whether there are realistic alternatives to replace their current bank financing and commercial debt would be one possible outcome for business borrowers. Refinancing business debt with a new commercial lending source would be a normal and practical result. For one example, exploring business financing options to obtain working capital financing elsewhere would be smart for a small business with a commercial line of credit that is about to be eliminated or reduced (as is now happening on a widespread basis).

It will be wise to explore small business finance alternatives even in situations where business owners are not being forced to acquire a new source for their commercial loans immediately. Very little notice has been provided to impacted commercial borrowers in most recent examples of banks which have revoked existing small business loans.

Small business owners analyzing whether it is feasible to permanently reduce commercial debt and small business bank financing is another effective business financing option. A focus on reducing overall business debt rather than merely finding a new home for small business loans would be the result of commercial borrowers pursuing this approach. This strategy permanently decreases interest expenses for the business when executed successfully. It will probably also improve credit ratings for the business and the business owners, and this can improve interest rates on whatever amount of business financing might still be needed.

The strategy of permanently reducing business debt is one which is likely to grow in popularity for commercial borrowers. There is a refreshing trend among individuals as well as businesses to stop using the services of companies which mistreat their customers on an ongoing basis. A casual review of any number of publications reveals that this kind of mistreatment is rampant among banks lending to small businesses. Since this disturbing trend is especially evident among larger banks, one small business financing option that deserves to be thoroughly evaluated is whether it is feasible to simply find a better and friendlier (and more effective) commercial lender. To the extent that many small businesses find that they still need some bank financing, certainly it seems that a worthy goal would be ensure that they find a good (effective) bank to replace a bad (ineffective) bank.

Financial Markets (ECON 252) Banks, which were first created in primitive form by goldsmiths hundreds of years ago, have evolved into central economic institutions that manage the allocation of resources, channel information about productive activities, and offer the public convenient investment vehicles. Although there are several types of banking institutions, including credit unions and Saving and Loan Associations, commercial banks are the largest and most important in the banking system. Banks are designed to address three significant problems in capital markets: adverse selection, moral hazard, and liquidity. Banks make money by borrowing long and lending short and use fractional reserves to lend more funds than are deposited. History has seen numerous problems in banks, including bank runs and insolvency. Government support and regulation, such as those implemented via the Basel Accord, as well as rating agencies help to ensure that investors trust the banks with which they have relations. Complete course materials are available at the Open Yale Courses website: open.yale.edu This course was recorded in Spring 2008.
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Question by Chris: When a commercial bank lends money lends money?
When a commercial bank lends money through a checking account the money the bank lends comes from or belongs to?

Best answer:

Answer by John Bradley
The money comes from one of two places:

1. The bank’s deposit base (the money customers deposit with the bank).

2. Other funding sources, such as debt securitization (the selling of bonds backed by loans the bank makes).*

Option one is the “old” way of getting money to lend.

Option two is the “new” way of getting money to lend, though bank’s overreliance on alternative funding sources was recently shaken up quite a bit with the recent “credit crisis,” as many banks saw the market for debt-backed securities shrink (in other words, the number of people willing to buy these securities got smaller, and the ones that remain weren’t buying as many as before).

Banks are now increasingly relying on good old fashioned deposits as a source of money to lend, though debt securitization is here to stay.

*When you apply for a loan, the bank may require that you put up an asset of yours as security. This asset may be cash, a car, real estate, or anything else of value. Debt securitization works the same way. To the bank, a loan it issues is considered an asset, and as with all assets, this assett has a market value. Bank can raise money in the financial markets by selling bonds (loans payable by the bank) that is backed by the bank’s total portfolio of loans, in case the bank defaults on it’s debt.

Know better? Leave your own answer in the comments!