Easing the small business credit crunch hinges more substantially on a shift towards relationship-based lending than on diversifying funding sources. Relationship lending is critical for small businesses whose finances and prospects may be relatively less transparent than larger firms. It uses financial analysis as a guide to credit decisions but is complemented by factors related to a firm's management, organizational strengths, and proposed business plan. This strategy assumes that knowing your customer and being involved as an advisor helps to reduce the risk.
The latest venture by social entrepreneur Judy Wicks is an empowerment model to lending that should be explored broadly. The Circle of Aunts & Uncles is a multi-generational local investment fund that provides low-interest loans and social capital to under-resourced entrepreneurs by intentionally creating trusting relationships between lenders and borrowers.
The model practiced by the Circle of Aunts & Uncles is a hyper do-gooder version of the focus on relationship-based lending that community banks have emphasized for years. Community banks, as a result, have become a key provider of credit to small businesses, with 44 percent of outstanding small loans to businesses coming from these institutions, typically at interest rates lower than those from larger banks.
SAleem Chapman
Policy & Advocacy Manager
The Good Economist 3
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