Bank financing has long been the coveted funding source offering lower interest rates and eliminating the need to forfeit equity. With banks balance sheets leveraged with questionable subprime loans the bar has been raised and many small companies that could have received bank financing a year ago --cannot today.

In conversation with a banker from a local regional bank (one that was fortunate to have avoided the mortgage debacle) we discussed the increase of loan volume from companies who have been asked out of their current bank. Many of the loans are good low risk loans, my banking associates said, but their current bank needed to reduce their leverage. 

Several asset based financiers and other alternative lenders I spoke with said they also are experiencing an increase in loan volume and are able to charge higher interest rates for low risk loans. As associate who is involved in leasing said last year he was asked to compete with banks on interest rates, whereas today he is simply thanked for doing the deal.

This was further expressed during a meeting with a hedge fund manager who provides debt and equity financing to companies. He said he was getting equity type returns on what was actually a low risk loan.

The small companies that are still able to receive funding are paying more for their capital.  With that said, small companies are less likely to pass the charges onto their customers, resulting in margin erosion.