Guidant Financial Group Blog

Isn’t it funny how often people, trends and Mother Nature seem to swing from one extreme to another? It appears that even big banks aren’t immune. Exhibit A: Their knee-jerk reaction to swing to the opposite extreme when their overindulgence and that of their patrons have created such financial turmoil.

The New York Times reported today that banks have decreased loans to small businesses by 3 percent over the last year (see Worried Banks Sharply Reduce Business Loans). This severe drop in commercial/industrial bank loans and commercial paper is really no surprise when you consider how much trouble banks got themselves into by making loans to just about anyone with a pulse and a pocketbook. But like a car trying to avoid a collision by overcorrecting and ending up in the ditch on the opposite side of the road, these institutions may be setting in motion a wipe-out of another sort.

Unfortunately, when the U.S. economy and American small business is directly affected by even the slightest change in business practices, the potential problems created by institutions overreacting to a big “Ooops!” can be major.

A large portion of the American work force depends on small business. At a time when jobs are hard to find and extra cash is scarce, the idea that small businesses may not be able to access capital for expansion is pretty scary. The Times article seems to allude to banks reducing loans to even profitable and highly qualified businesses.

For those who use 401(k) small business financing, having more equity in their business than their peers may be a decisive advantage when looking for additional cash.
Our hope is that banks will find a happy medium soon. They’ve already messed things up with the mortgage crisis; we can ill-afford an even bigger mess on our hands.