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This is an interesting take on what it means to be a direct lender. To summarize, almost all financial institutions lend money that is not ‘their money,’ it is their customer’s deposits. This is why they are able to …

Recent data shows that SBA lending in Southern California is up about 50% over the same period last year and dollar volume of these loans has nearly doubled. This appears to be good news for small business and supports the notion that the economic stimulus enacted in 2009 reached the right hands.

However this good news does not paint a complete picture.

I read a financing expert’s Blog post about his experience helping a client get funding. It provided a much needed reality check as to how financing availability is not static; rather it’s constantly changing and even financially strong, profitable businesses may find that funds are not as easy to get as they once were.

“I recently worked with a client seeking financing from their business where the business is well established, has an excellent balance sheet, and is very profitable. The Owners were experienced, established, and had a solid track record of performance.

So why were they looking for financing?

Their primary and only institutional lender could no longer underwrite the type of business they were in.

A financing decision that the State of California is in the process of making is the perfect model of how asset based lending can be used. The State of California needs money to run their organization (sound familiar business owners?). However the State is not in a good position to take on more debt. In their case it is because they already have a great deal of debt but in the case of business owners, they may be too small, too young or perceived as “too risky” to borrow. However the State of California has an asset, in their case office buildings, that they are considering using as collateral in a ‘sale lease-back’ arrangement so that they can make use of the cash value of the asset while still maintaining use of the property. This is the prototypical model for asset based lending. Let me break it down further.

The current recession has created a bleak lending environment for businesses and new data suggests it is getting worse. Today Federal Reserve Chairmen Ben Bernanke said that “many “creditworthy” firms with “strong” cash flows are having trouble getting loans.” This statement was based on data showing that S.B.A. lending has seen a two-thirds drop in the month of June compared to May, to bring it to the lowest levels in decades. Bankers say this steep drop is due to the expiration of a bill that provided higher percentage guarantees of loans made through the S.B.A. program.

With the S.B.A. taking a big hit, business’s have increasingly turned to asset based lending as it is usually the only option left open to them.

Trust is a key component of any lending arrangement. The lender needs to have trust that the borrower will pay them back. The borrower needs to have trust that they are getting a fair deal that is in the best interest of their company; not a deal that only suits the lender.

However business owners can be desperate for money, and there are profiteer’s looking to capitalize on this desperation. The Wall Street Journal wrote and article about such a man by the name of Surinder Multani.. This loan broker charged steep fees to small businesses owners on the basis that he could secure a SBA loan for them. He did deliver on this promise, brokering almost fifty deals totaling $44.3 million dollars. However these loans were not of benefit to either the borrower or the lender as roughly half of the loans he brokered ended in default.