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How Financing Trends Impact Entrepreneurship

Financial EfficiencySmall businesses come in myriad flavors–but capital is a constraint, on some level, for every one. Unfortunately for entrepreneurs, the mechanisms now in place to finance them are inadequate. To wit:

Trend No. 1: Lemming-like behavior by regional banks

Securitization (the slicing up of loans into pieces, each bearing a specific level of risk) clearly has its benefits, but not when investors as a whole underestimate–or ignore–those risks. Having rushed headlong into subprime lending, banks, and thereby their small-business customers, are now dearly paying the price.

Implications: Tighter credit terms–or none at all–for entrepreneurs. (For more, see “The Real Scoop On The Credit Crunch.”) We have already seen banks try to recoup their losses by increasing rates on credit cards.

This article originally appeared on Forbes.com.

Why The Needy Win

Financial EfficiencyI’ve met hundreds of entrepreneurs looking for financing. Too few knew how much they needed and what they needed it for. In fact, many didn’t have a clue–and that’s no way to scare up capital.

For starters, investors (debt and equity alike) have limits on how much or how little they can finance. Minimums apply because it may not pay to do the required due diligence on too small a deal, or perhaps because of pressure to invest a certain amount in a limited number of ventures. Maximums (often contractual or regulatory) exist because, well, there is only so much money to go around (sometimes financiers exceed them by forming consortiums).

Financiers also want to know if the amount you’re asking for sounds remotely reasonable. Example: Say your company currently generates $500,000 in sales and you wanted to add $25 million worth of equipment and facilities to enable you to handle $50 million in sales. The chances of business ramping up 9,900% anytime soon is nil, so asking for $25 million would probably get you laughed right out the door.

This article originally appeared on Forbes.com.

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