Business debt reduction has provided unexpected financial benefits to companies of
all sizes when they were literally forced to consider this option as a result of banks effectively playing a much smaller role in commercial loans. This is especially true for small businesses. While banking institutions have previously been reliable sources for small business loans, this is no longer the case in most circumstances.
Having less debt rather than more debt is generally a prudent financial strategy for both individuals and companies. However just as banks made it too easy for unqualified borrowers to obtain residential mortgage financing in many cases, most commercial lenders also made working capital loans and other forms of small business financing available with very little scrutiny. To a very large extent this was due to government guarantees backing the loans which were provided. In such cases even if the borrower failed to repay a loan as agreed, the bank did not lose money because of a government guarantee.
Eventually the government subsidies either changed or were eliminated at about the same time that a banking crisis started several years ago. A large part of the banking problems were caused because of excessive risks and debt assumed by banks. When real estate values decreased more than expected, the net worth of many banks was wiped out within a very short time. This led to a government bailout which in turn was supposed to lead to banks returning to previous levels of lending to small businesses. As is now evident by a variety of statistics and data, banking institutions used the bailout money for other purposes. This left most businesses high and dry when they needed routine levels of working capital financing and commercial loans.
Small business owners might have expected the reduced lending activity to them to be temporary. What has occurred instead is largely a permanent restructuring of the banking system in which small business loans have been reduced to a very small role. Faced with their bank saying no, small businesses have prudently explored what financial alternatives will best enable their company to survive. Reducing business debt is one of the most realistic choices for most companies forced to deal with an ongoing shortage of commercial financing. As just one prime example of how banks saying no has resulted in some unexpected benefits, improved negotiating with customers, lenders and suppliers will often prove to be better for the financial health of a company than taking on more debt.