From Bank Loans To “Smart Capital”

This arrangement leads bankers down a very narrow and predictable path. They can only make loans in situations in which money is safe and repayment is almost certain. So, who qualifies for such a loan from a bank? Established companies may qualify if they can repay the loan from cash flow, and if that dries up, then from the liquidation of assets. Even if a company has the assets or collateral to cover a loan, it still might not be worth the risk.

After all, if the deal goes south, the bank has to sell the assets to get its money back. These assets might not fetch as much as the bank thinks. Or they may be difficult to sell at all. Suddenly, the bank starts paying carrying costs and the whole situation quickly gets messy.