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Easy Credit vs. Regulations: Why You Can’t Get a Loan

Interest in alternative financing methods is accelerating all over America.  This is no accident.  It is a direct reaction to the way banks seem to have shut their doors for good.  If you’re not trying to borrow a million bucks, they don’t want to talk to you.  Even if they do “open a dialogue” with you, the conversation often stalls out.  At the same time, favored business projects and big businesses seem to be getting handout after handout from the government.  What’s going on?

A large part of what’s going on is regulation.  Red tape, bureaucratic hurdles, passing the buck – call it whatever you like, the net result is no new dollars for small businesses who need loans.  Despite what the Obama Administration may say about wanting to light a fire under American entrepreneurs, they have systematically passed or influenced legislation and regulation that effectively cripples small business loan operations.

Big Brother Watching

One key area that has been impacted by the administration’s stance on the financial crisis is banking regulations.  It’s not even that new laws are in place here – it’s that existing laws are being enforced more strictly.  Regulators have also been repeatedly burned by big bank failures and public bankruptcies for pet financiers, so they are taking out their fear where they can do it most easily – regulating small business lending right out of existence.

Many small-town bankers would love to be making more loans, but they’ve got regulators breathing down their necks.  The same watchdogs that let Enron, Countrywide, Lehman Brothers, and Madoff happen are giving your local banker the third degree over small business loans that seem even the slightest bit risky.  This extra hassle makes it not worth the trouble to deal with anything less than big dollar loans, effectively shutting down local lending markets for installment and credit line accounts under $100,000.

Hello, Dodd-Frank

Dodd-Frank is massively unpopular in financial circles, which should be a concern given that all of the provisions of this complicated bill haven’t even come into effect yet.  The bill is complex and loaded with onerous new regulations and reporting requirements for financial industries.  There are mandates to use more approved minority contractors, mandates to hire certain types of personnel, mandates to monitor some industries more than others, mandates … well, you get the idea.

With all these new mandates, bankers are holding back on partnering with anyone new until everything gets sorted out.  Government-approved projects can sail through, but your application will probably get held up.  You’ll need to submit extra documentation and jump through additional disclosure hoops to get the same money.  For many businesses that need money now, the delays and paperwork requirements make it not worth the trouble.  It’s easier to seek out alternative financing than it is to deal with all the hassles of traditional lenders.

CARD This!

A final wrench in the gears for small business owners is the CARD Act.  While originally designed as a means to bring credit card issues under control after the binge years leading up to 2007/2008, this 2009 Obama Administration bill seems to have a bit of heartache for everyone.  Banks have a cap on their processing fees and credit card companies have caps on their interest ranks.  This means they’re making up the difference from customers like you.

One means of making up the difference is with additional fees, but another is by raising interest rates.  Certain government loan programs may still offer ridiculously low rates, but the average Joe has to deal with the additional costs passed on by banks thanks to the CARD Act.  This makes borrowing an expensive proposition that few small businesses want to take on as a burden, at least until the economy recovers.

It all adds up to promises of readily available capital from government mouthpieces but a nearly impossible scenario for any real business looking to borrow.  If you’re not denied by asking for a loan “too small” to worth a banker’s trouble, you’re hit with higher costs due to new regulations.  The application process is tedious, and regulators are demanding extra proof at every turn.  Frustrating and expensive, the process of getting a loan in this environment is often not worth it.  As a result, you can’t have your loan, and neither can any other small business that needs it.  No wonder our economy’s so great!

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