Tom Stephenson, Managing General Partner, Verge Fund
The primary way in which banks make money is through loans. But in today’s economic environment, regulators are requiring banks to increase their reserves – the capital that backs loans – to support an increasing number of loans at risk of default. As banks work hard to reduce their bad loans, many are making far fewer new loans and decreasing the limits on existing lines of credit. Their problem is that they need to make more loans to make money, but they are being pressured to make fewer loans.
For business owners in need of capital to grow or stay afloat, a bank’s problems can become their own. A company that once qualified for a line of credit now might only qualify for a smaller line or no line at all. This is often true for a company seeking its first round of debt financing, but even companies with long-standing relationships with commercial lenders feel the scrutiny. Banks and businesses operate in a vastly different financial world than a few years ago.
