How More Red Tape May Hurt Small Business Loans

September 17, 2015/0 Comments

Regulations of small business loans are necessary. But too much red tape could hinder, rather than help, would-be small business owners get the funding they need to launch their ventures. The following possible downsides of increased red tape are necessary to consider in the face of potential new business loan reporting requirements coming down the line.

How More Red Tape May Hurt Small Business Loans

Small business owners can make the best and most informed lending decisions by comparing lenders, understanding lending restrictions and requirements and more.

Defining a Small Business

According to New Red Tape Looms for Small-Business Loans, one of the key elements of the new reporting requirement is defining which businesses are subject to those requirements. Questions such as whether companies with revenues of less than $1 million will be subject to the requirements or whether regulators will draw their definition from the Small Business Administration must be addressed and answered.

Facing a Lull in Loan Approvals

When the new lending red tape comes down the line in any industry, it often brings a lull in loan approvals. This pause often happens while lenders become acquainted with the new lending requirements and adjust their lending practices as needed. Of course, making the proper changes to lending practices is an important part of staying within new regulations. But this lull can be detrimental to would-be small business owners who are waiting for final loan approval to launch their ventures.

Meeting the Requirements

Navigating the requirements of small business loans can be confusing for new business owners, especially with additional rules. The details that small businesses must report to stay within regulations can also be confusing. Again, regulated lending is essential, but too much regulation can create contradictory requirements, confusions and could leave some small business owners without the credit needed to start or expand their ventures.

Considering Loan Amounts

The loan amount that small business owners can apply for and receive is often a central concern of any new proposed regulations. Obviously, restrictions should be in place to prevent small businesses from borrowing more than they can repay. No one wants another crash similar to what happened in the housing market. However, too tight of restrictions can also backfire by disqualifying worthy loan requests or leaving business owners without the full loan amounts they need.

Looking at Revenue

More red tape on small business lending could place a greater emphasis on revenue tracking. Tracking how much a company makes compared to a loan amount requested is important. But, who should be in charge of determining the exact influence that revenue has on required loan amounts? Should it be the decision of lenders, or of government regulators? These and other questions are sure to arise as new reporting requirements are considered.

Proper regulations regarding small business loans are necessary. But too much red tape may hurt, rather than help, small business owners who need funding to launch their businesses. From understanding the definition of a small business to researching changes in loan requirements, there is much for lenders and small business owners to consider on this topic.


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