It is hard to not be a bit anxious given the recent news events…. Bear Stearns, Lehman, Freddie and Fannie, AIG…. what’s next ?  Although the news has been focused on the financial institutions, large global companies and the investors involved, small to mid-sized companies are also under a lot of pressure.  

Small businesses have always been challenged when it comes to securing capital. Many are unable to qualify for a bank loan, given their time in business, cash flow or lack of substantial equity. Some rely on alternative financing institutions that offer asset based lending. Moreover, some use personal credit cards; not necessarily the best decision but often is the only choice available.

What began as a subprime crisis quickly moved to a credit crisis hitting small companies on two fronts.  Many small companies use their homes to fund their business, either as collateral on a bank loan or through a home equity line. Falling home values reduce the amount of money they can borrow. Worse yet, if the home was used as collateral on an existing loan and its valuation threatens loan covenants, the bank can call on the loan causing companies to struggle to find new financing.

Prior to the catastrophic events of this week, small companies were already feeling the effects of the credit crunch. Now capital is becoming even harder to access and for those companies lucky enough to qualify for a loan, the cost of capital is much higher. In today’s news we are hearing a lot about the affect on the markets and the large financial institutions but we cannot lose sight of the strain it places on our smaller companies. Once the meltdown has subsided it will be these companies that will need to turn the economy around. It has always been said that small businesses are the backbone of our country—we may soon learn how true these words really are.