Business Loan is Dead: Long Live the House Equity Loan (For Businesses)?

The lifeblood of many businesses, the traditional business loan, appears to be on life support. While lenders are eager to tout their commitment to small and medium-sized enterprises (SMEs), the reality paints a different picture.

A Fixation on Collateral, Not Creativity

The traditional business loan assessed a company's potential, its vision, and the viability of its business plan. Today, however, lenders seem more interested in a single factor: collateral. In a risk-averse environment, they heavily rely on the personal assets of the business owner, particularly the equity in their home. This essentially transforms a business loan into a glorified house mortgage, placing an undue burden on the entrepreneur and hindering their ability to take calculated risks.

The Super Stable Fallacy: Loans for Those Who Don't Need Them?

Furthermore, lenders often restrict access to capital to businesses that are already demonstrably stable. Companies with a proven track record and minimal financial risk are more likely to secure a loan. This creates a paradox: businesses that truly need a financial boost to scale or navigate challenging economic times are left out in the cold. The very purpose of a business loan – to empower growth and innovation – seems to be lost.

Frank Zappa's lesson

The current situation reminds me of an old interview of the great Frank Zappa, an American musical iconoclast who defied easy categorization.

Zappa argued that while the music industry of the 60s, run by "old guys with cigars," took chances on experimental music, the modern industry, filled with "supposedly hip young executives," had become more risk-averse.

Remember the sixties... you know, that era that a lot of people have these glorious memories of which really weren't that great, those years... But one thing did happen during the sixties. Was some music of an unusual or experimental nature did get recorded, it did get released. Now look at who the executives were in those companies at those times. Not hip young guys. These were cigar chomping old guys who looked at the product that came in and said 'I don't know who knows what it is, record it, stick it out there.' We were better off with those guys than we are now with the supposedly hip young executives. You know who are making the decisions of what people should see and hear in the marketplace these days? The young guys are more conservative. And more dangerous to the art form than the old guys with the cigars ever were.

The original interview: Zappa's interview

The Neglected Business Plan: A Relic of the Past?

The heart of any loan application should be the business plan. This document details the company's goals, strategies, and projected financial performance. However, many lenders appear to treat the business plan as an afterthought, failing to critically evaluate its potential for success. This lack of focus on the actual business itself raises questions about the true priorities of lenders.

A Call for a Lending Renaissance

The current state of business loans stifles entrepreneurship and hinders economic dynamism. We need a return to a system that values a company's potential and the ingenuity of its leadership. Lenders must move beyond a one-size-fits-all approach based solely on collateral and delve deeper into the unique needs and aspirations of each business. Only then can the true spirit of the business loan be revived, fostering a thriving ecosystem where businesses can flourish.

OK, maybe I agree... but did you check an angel investor?

While angel investors can be a valuable source of funding for startups, they are not a silver bullet for the current business loan crisis. Here's why:

Focus on High-Growth Potential: Angel investors typically seek companies with significant growth potential, often in disruptive or technology-driven sectors. This leaves established businesses with more traditional models struggling to secure funding.

Equity vs. Debt: Unlike loans, angel investors provide capital in exchange for equity in the company. This means entrepreneurs relinquish a portion of ownership and control, which may not be desirable for all business owners. Additionally, the pressure to deliver high returns can sometimes lead to a misalignment between investor priorities and the long-term vision of the company.

Limited Availability: The pool of angel investors is finite, and competition for their funds can be fierce. This makes it challenging for many businesses, particularly those outside major economic hubs, to access this type of funding.

In conclusion, while angel investors play a role in the funding ecosystem, they are not a replacement for a robust system of business loans that cater to the diverse needs of entrepreneurs across various industries and stages of growth.

Finally

It's not always multi-million dollar shortfalls that hold companies back, but often smaller gaps in the range of ten thousand dollars. This lack of flexibility in lending strangles businesses, potentially leading not only to company closures but also to a future with fewer lenders as a result.