CrowdFunding is a new method of raising capital which will replace traditional bank lending

posted Oct 7, 2012, 10:45 AM by David Khorram   [ updated Oct 7, 2012, 10:59 AM ]
Posted By : www.crowdFudningPlanning.com  David Khorram

As a Small business with 20 years  background , We have been puzzled with nor being able to raise money for our new ideas and business ventures. We have proven experiences , results  and even hard assets but still we are getting no from the banks. They tell us there are cash flow lenders and not asset base lender . Question is if we have cash flow , why we need to get a loan ?

We have been searching for the reason and  the solution. In our research we have found a good article  ( B- why banks aren’t lending to small businesses. ) explaining why and also  a  new method called Crowd Funding .

Right now, the interest rate environment is favorable. Banks are charging 4.5 to 6 percent interest on most loans, compared with a federal funds borrowing rate of zero to 0.25 percent and low deposit rates. According to Market Rates Insight, the average CD account in Florida paid 0.97 percent in April, while the average savings account paid 0.21 percent.

With rates this low, it would not be interesting to banks to  lend or  to go long term on a fixed rate without a plan to be able to adjust to a changing environment.”.

These leave us with few choices;
  1. Reduce overhead but increase efficiency 
    • We have been extremely successful in this area using Google business technology , marketing and research . We re trained 5 staff and added more than $500K to our revenue through new business and new customers in 20012   ) 
  2. Find an over sea lender which still believe we are a low risk compare to other countries 
    • No tried this yet 
  3. Try to make CrowdFunding as contentious and sustainable funding method for our business ( CrowdFund every day)
    • We have had success with Crowd Funding  and build new businesses and ventures sharing our success with others  ( CrowdFunding consulting and experts ) 
  4. Find hard lending that carry high interest rate 
    • We do not recommend this 
  5. Raising money through Angle investors and venture caps
    • VC and AI approve only 1% to 2% of all applicants at this time and many are not in the top 2% but have practical and money practical making ideas  

A- New method of raising the capital from the Crowd 99%





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B- why banks aren’t lending to small businesses . (traditional old  method of raising the capital from the banks  1%

I think I figure this out – why banks aren’t lending to small businesses.

You would think that in an environment of low interest rates and so much noise in the market regarding the lack of small business’ access to capital, not to mention several government programs (Federal and States) designed to entice banks to open their vaults, that money would be flying out the door into the hands of those business owners that need it.

Yet, banks aren’t lending to small businesses – but they are lending to those old tried and true big businesses.

The reason for all of this is perceived risk. It use to be that banks would look at new credit applications and judge the risk of repayment. Then, they would try to find ways to mitigate any apparent risk through alternatives or secondary forms of payment sources like liens on collateral (or the entire business) or personal guarantees. To finish it all up, they would then set the interest rate based on the overall risk (what remains). Simple enough.

But, it is just not like that anymore.

There was a time that there was a trade-off between risk and reward. If banks took a little more risk (within the confines of their policies and government regulations) then they would get the pay off. But, today it’s not like any of that.

Banks got spoiled before the financial crisis this country is still struggling through. When the government allowed banks to underwrite any credit (good or bad) and sell them off to Fannie Mae and Freddie Mac, they went hog wild because they had no risk. Underwrite a loan (business or personal) then sell it off. If it’s not on their books, they no longer held any risk – period. Thus, they had no risk and all the reward.

I spent the last couple of weeks trying to figure to why banks weren’t lending to small businesses and this is what I found:

I read several independent and government backed surveys asking banks about their current lending policies. While the majority gave the standard answers like not enough qualified borrowers, poor cash flow and depressed collateral values; a few hinted at what was really going on – that all banks have fundamentally changed the way they view risk, it is not longer about risk and reward or in finding ways to mitigate said risk but to reach a zero risk tolerance.

As stated, they got use to having no risk – it is the only way the know how to operate these days.

How and Why They Got This Way:

  • Banks currently have a lot of risky assets already on their books from bad commercial loans, bad commercial real estate loans and declining value long- and short-term investments – not to mention a lot of risk exposure in Europe and other declining overseas markets. They just are not taking on any more risk.

    Why you might ask?

    • Because they have to allow for all that risk by setting aside deposits and other cash into an account that they cannot use – called their Allowance for Loan Loss Account (ALL). And,
    • See the next point.
  • Regulators, while publicly stating that they want banks to lend more to small businesses, privately they are warning banks to lower risk as not to help create another financial mess.

  • They just got use to soaring profits with little or no risk and they don’t know how to change or bring it back into the real world.

The end results banks are only lending to those businesses that don’t need the money and pose no risk – at all.

What Small Businesses Can Do:

Do know that banks were always more of a convenience than anything else. You really don’t need them and all the hassles and costs they bring with them (like making your take a bunch of expensive products from them that you don’t need).

Show them you don’t need or want them, and then maybe they will come around and realize how much they need and want you and your business. In the mean time, here are several ways that you can grow your company without the help of these non-lending banks:

  • Continue to cut cost and increase revenue to the point your business poses no risk. 

  • Seek out alternatives to banks – a bunch of new and alternative lenders have cropped up to fill the lending gaps left behind from banks not lending – these alternatives can be a bit more expensive and more specific to each individual need of the business but they are also tailored to all small businesses regardless to size or stage of development (meaning that they will work with YOUR business). 

  • Find your own internal alternatives – like working with your suppliers for trade credit (delaying payments to them until after you have sold those goods to your customers) – know that they need your business as much as you need theirs or seek credit from vendors to purchase their products from them.

It is unlikely that banks will change in the near future. Personally, I don’t think they have it in them – they either don’t know how to change or operate their business like a bank should be operated or they won’t - as they perceive it as being too hard. All they do now is spend their time raising fees and trying to stop small banks, credit unions and new alternatives (like crowdfunding) from stepping in and filling these lending gaps.

So, the power is in your hands and what you can do to grow your own business. Put on that entrepreneur hat and get to work. 




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