TIP: Borrowing in A Credit Crunch

Tip of the Month

June 2008

TIP: Borrowing in A Credit Crunch

Things are tough all over. As a direct result of the crisis precipitated by bad housing loans, even people with good credit ratings are finding it tough to borrow money to fund their business ventures. Experts who look to the “TED spread”-- the difference between the interest rates used by banks for loans to other banks (known as Libor) and the rate for three-month Treasury bills --as an indicator of future lending don’t see any immediate relief in sight. Currently the TED spread is 1.68 percent –significantly higher than usual levels. Obviously, if bankers are leery of making loans to fellow bankers, consumers are in for a correspondingly tough time. Until the spread drops to around 0.4 percent, credit is expected to remain tight. You can track the three-month Libor rates and the Treasury bill rate online at Bankrate.com. You get the spread by subtracting the Treasury bill number from the Libor.

In the meantime, if you need to find a loan now, here are a few ideas that might help. The following are general ideas only. Before embarking on any major financial move, it is wise to consult your financial and professional tax advisors:

Leverage your own resources first. Perhaps you can negotiate a loan with friends or family. If that is not feasible, you might consider obtaining a home-equity line of credit (HELOC) based on the value of your home or a second mortgage.

If you have an established small business, the Small Business Administration (www.sba.gov) or SBA may be helpful to you. The SBA sets loan guidelines for lenders and helps minimize the risk to lenders by offering its own guarantees. Your business track record, your own personal credit history, and any relationship(s), you have had with banks will all be part of the evaluation process.

If the standards of more traditional lenders are too tough for you, so-called “micro loans” or Community Express Loans might be a viable alternative source. These small loans are offered by certain lenders and are also supported by the SBA. They are designed to fund start-ups or expansions of existing small business ventures. The ceiling on these types of loans is about $50,000, and the repayment schedule is spread over seven to 10 years. Interest rates are variable. They’ve been running around 4.25 percentage points over prime rate recently.

However you decide to proceed depends upon your own personal situation, and running your plan by your professional tax and finance consultants is important.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.