I continue to hear the same thing from every small business owner that I speak to about the availability of credit:
"Banks are just not very friendly right now," said a friend with a coffee importing business.
"Who are you kidding," said another (landscaping). "If banks would give me some money, then I could buy some more equipment. But no bank is doing that."
"We'd like to go with a bank," said another (small restaurant) "but we're tired of hearing 'no'."
It is frustrating, because taxpayers have supported (unwillingly) these banks through TARP investments. It is frustrating, because many banks are using that capital for derivatives trading. It is frustrating, because regulators are supposed to be holding these banks accountable, and yet for all the evidence, they are willing to take their claims at face value.
My friend with the coffee importing business has the worst story. Banks will provide hims with some capital, but only on a factoring basis. For every dollar her has in inventory, they'll advance him 70 cents. They take that 70 cents back when he has a sale, and then they take back an additional 8 percent of the revenue. In essence, they're taking at least half of his margin, plus his principal. It is hard to estimate the interest rate, but 8 percent over a month or so is very expensive.
Ultimately, we are becoming an economy where small businesses have to rely on "friends and family." Many people don't have social networks where plenty of friends have a spare $10,000 lying around. It is also tough when individuals come into entrepreneurialism with lots of student loan debt.
Just a word of caution: if you are "friend" or "family" to a small business, you are required by the IRS to charge interest if the loan amount is greater than $10,000. This is the Applicable Federal Rate. This month, the minimum interest rate for a mid-term loans (longer than one year) that is paid back on a monthly basis is 2.16 percent.