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Posts Tagged ‘small business loans’

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Small Business Access to Capital: What’s the Problem?

July 7th, 2011 ::

By Karen Axelton

In late June the House Committee on Small Business held a hearing to explore the state of small business financing. The Policy Dialogue on Entrepreneurship blog reported on the hearing:

Delivering a summary of his report on the State of Small Business Access to Capital, Treasury Secretary Timothy Geithner noted that lots of small businesses were concentrated in areas related to real estate and construction—the industries hardest hit by the financial crisis.

Geithner reiterated how the Small Business Jobs Act of 2010 aimed to provide small business with more access to capital through:

  • modifications to the SBA Capital Access Programs
  • a State Small Business Credit Initiative
  • creation of the Small Business Lending Fund (SBLF)

The two latter initiatives were aimed at improving the amount of capital available to community banks and encouraging them to lend to small business. However, much of the hearing focused on why these efforts don’t seem to have led to results and why small businesses are still struggling to get capital they need. The Committee chair, in particular, noted that there’s a gap between banks having plenty of money to lend, but small businesses saying that they still can’t get money from banks.

Responding to the questions, Secretary Geithner said that the Obama Administration is undertaking a five-point strategic plan to help small businesses expand and invest:

  1. Providing significant tax relief targeted to small businesses
  2. Helping small businesses obtain access to working capital on more favorable terms
  3. Regulatory reform, which includes a government-wide review to address regulations that hinder small businesses
  4. Increasing federal contracting options for small businesses and improving their access to procurement opportunities
  5. Programs to help small businesses access foreign markets and compete overseas

Will these efforts help? It remains to be seen.

Image by Flickr user Cliff 1066 (Creative Commons)

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Posted in Capital Access, Raising Capital, Small Business, small business | No Comments »

Small Biz Resource Tip: Rapid Advance

June 22nd, 2011 ::

Rapid Advance

There comes a time in every entrepreneur’s life when the business could use a quick influx of working capital—whether it’s to buy additional equipment, add a new product line or fix the air conditioning unit. But there isn’t always cash on hand, especially in a still recovering economy. RapidAdvance offers a quick solution: Fill out a one-page application and RapidAdvance will tell you how much you qualify for within 24 hours. Whether you need the cash for startup or to help grow your business, RapidAdvance can help you secure the funding you need and work out flexible repayment terms.

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Posted in Capital Access, Raising Capital, Resources, Small Business, small business | No Comments »

New Data on Small Business Lending: Outlook Is Positive

June 14th, 2011 ::

By Karen Axelton

Small business lending showed some positive signs in new data recently released by PayNet. The Thomson Reuters/PayNet Small Business Lending Index, which measures the overall volume of small business financing, increased 17 percent in April compared to the same time a year ago, Reuters reports.

While this was a decline of about 1 percent from the prior month, this was the ninth straight month that the Index had shown a double-digit increase. Those sustained gains are a good sign that small businesses are ready to grow as soon as customer demand for their products and services increases again, said PayNet president and founder William Phelan.

“The fact that small businesses are hanging in there is a good sign for the economy” Phelan told Reuters. “The data tells us [small businesses] are having more of a pause than a major contraction.”

While economic signals have been up and down recently, overall, increased small businesses is considered positive for the economy as a whole because small companies traditionally account for the majority of new hires. The Thomson Reuters/PayNet index has proven to be an accurate predictor of GDP trends about two to five months in advance.

More good news: In separate data released by PayNet recently, fewer companies are falling behind on existing loan payments. This indicates more businesses are ready to take on new loans if needed for growth.

Accounts behind by 30 days or more (considered moderately delinquent) fell to 2.06 percent in April—a typical level before the recession. Accounts 90 days or more behind (considered severely delinquent) fell to 0.64 percent in April from 0.67 percent in March. And accounts behind 180 days or more (in other words, in default and unlikely to ever be paid) dropeed to 0.76 percent of total receivables in April, from 0.77 percent in March.

Overall, these are promising signs. In recent years, small business lending had slowed to a crawl, first by banks tightening their requirements and later by small businesses reluctant to borrow because of concerns over the economy. If small businesses are showing the confidence to take on new debt, that’s a positive thing. Are you ready to take on a loan?

Image by Flickr user Steve Snodgrass (Creative Commons)

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Posted in Capital Access, Raising Capital, Small Business, small business | No Comments »

Do You Know the Six C’s of Credit?

May 26th, 2011 ::

By Maria Valdez Haubrich

Are you trying to get a loan or line of credit for your small business? Then you need to know what bankers are thinking when they consider your application. One key to success in obtaining the financing you need is to understand the “six C’s of credit.” Here’s a closer look:

1. Character: Bankers will consider your personal character, which includes both your personal and business credit history. Character depends a great deal on other people’s impressions of you, including your trustworthiness and integrity. The banker will consider your references (are they, themselves, of good character?) as well as your experience in the business and/or industry. Last, but not least, what kind of impression do you make on the banker?

2. Capacity: Does your business have the ability to repay the money you are borrowing? Bankers don’t want to lend you money if it won’t have a positive result on your company; nor do they want to throw good money after bad with a loan that will just maintain the status quo. They want to see growth as a result of their investment so that they can get their loan back with interest. How soon will your business show a profit as a result of the changes you plan to make with the loan proceeds? Will the profit be sustainable and how big will it be? These are among the biggest questions bankers want answered.

3. Capital: How much capital do you and your business already have? The saying “it takes money to make money” applies here. Bankers will want to see that you have personally invested in your business and are willing to invest more. If you aren’t willing to put money into the business, why should they be? They also want to see that your equity in the business is growing.

 

4. Collateral: Collateral is extremely important in getting a small business loan. The bank will want to see that, in case the profits you project from the business don’t pan out, you have a “backup plan” for how they will get repaid. This can include a secondary source of repayment; a guarantee from a third party; or assets owned by you or your business. Intangible assets like goodwill or expertise don’t count; banks want to see tangible assets such as equipment, property, inventory or accounts receivable that could be sold to pay off the loan if necessary.

5. Conditions: This refers to the loan terms, including how much you are requesting, the length of the loan and the purpose you intend to use the money for. Conditions also encompass the current economic state of your industry and your region. For instance, if you own a restaurant and the restaurant industry as a whole is struggling, you will have to work extra hard to show why your particular restaurant won’t be affected by the conditions that are affecting other eateries.

6. Cash Flow: Last, but not least, bankers will want to know how the loan or line of credit will affect your business’s cash flow. How will you use the money from the loan? Have a detailed plan for what you will do and how it will help your business grow. The point is, bankers want to see that you have adequate cash flow to repay your loan.

Getting bank financing is still not easy in today’s economy—but if you have the six C’s of credit under control, you’ll greatly improve your chances of success.

Image by Flickr user Beast of Traal (Creative Commons)

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Posted in Capital Access, Raising Capital, Small Business, Uncategorized | 2 Comments »

Most Small Businesses Use Savings, Not Financing, to Grow

May 19th, 2011 ::

By Maria Valdez Haubrich

Many small business experts urge startup firm founders to use their personal savings to finance business startup, rather than trying to get financing from outside sources. This was good advice even before the Great Recession hit, and following this advice has become even smarter since then.

Most startup entrepreneurs are heeding that advice, a new study shows. Preliminary data from the 2010 Survey of Consumer Finances, a report by the Federal Reserve that’s scheduled to be released in full in 2012, show that more than 70 percent of U.S. small businesses use personal savings or assets as a main source of business funding, The Wall Street Journal reports.

But this doesn’t apply only to startups. As the businesses grow and become more established, one-third of their owners say they still use their personal savings to run, grow and expand the business. In comparison, a mere 5 percent said they use credit cards or business loans.

Perhaps it shouldn’t be surprising that small business owners are using their own money to run and grow companies, instead of trying to get loans or outside investment. During the depths of the recession, many entrepreneurs had their loans called in by banks—in some cases, even if they’d never missed a payment. And still others were turned down for expansion loans despite having orders in hand and proof of demand for their products or services.

Such behavior by banks seems to have convinced many small business owners they’re better off relying on no one but themselves financially. In fact, out of all the small businesses surveyed (for survey purposes, defined as companies with fewer than 500 employees), a whopping 80 percent say they have not even applied for a business loan in the last five years.

Surprisingly, however, the survey also shows that small business owners’ fears of being turned down by banks may be unfounded. Of those small businesses that applied for loans, only about 12 percent were denied. And almost every small business owner whose loan was approved got the full amount of financing he or she was seeking.

If you’ve let “fear of failure” hold you back from seeking a bank loan, maybe now is the time to make your move.

Image by Flickr user Jamie Welsh (Creative Commons)

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Posted in Capital Access, Raising Capital, Small Business | No Comments »

Small Biz Resource Tip: SBA Loans

April 28th, 2011 ::

SBA Loans

As part of the newly redesigned Small Business Administration website, the SBA has created a Lender Toolkit to help small business lenders connect better with small businesses and to provide more information for banks on how to be designated an SBA lender. This only means more opportunity for small businesses to get loans needed to start and grow their businesses. As a small business, you’ll find a list of the types of SBA loans available; a loan application checklist; and information on credit scores, determining your financing needs and workshops you can attend to get more information.

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Posted in Capital Access, Raising Capital, Resources, Small Business | 1 Comment »

Are Bank Mergers Hurting Small Businesses?

April 26th, 2011 ::

By Karen Axelton

When the Great Recession struck in 2008, among the first casualties were small business owners whose loans were called in by big banks—often despite having a great credit rating and making every loan payment on time. Smaller, community banks quickly emerged as saviors. In 2010, 73 percent of small businesses using small banks got the credit they wanted, compared to just 48 percent of those using a large bank, a recent report by the National Federation of Independent Business showed.

But now, smaller banks small businesses have come to rely on are increasingly in jeopardy, as big banks are snapping up smaller ones in mergers and acquisitions. According to a recent report by CFO Magazine, the consolidation shows no signs of slowing. Due to a combination of acquisition and failure, the number of small banks has been shrinking for the past 10 years, CFO reports, declining from 10,204 insured institutions in 2000 to 7,657 in 2010.

Do you need to be worried that your community bank is at risk of acquisition? So far, banks most likely to be bought are those that are in distress or have already failed. Being located in a region where the housing market is still struggling is also a warning sign, as many larger banks in these areas are seeking ways to make up the lost income from mortgage lending.

But as the economy improves, experts predict, even thriving community banks won’t be immune. And with regulatory and reporting burdens set to increase, thanks to the Dodd-Frank Wall Street Reform and Consumer Protection Act, smaller banks may have to get acquired by bigger ones just to get the resources they need to comply with all the paperwork.

What will it mean for you if a big bank buys your community bank? First, small business ability to get capital is likely to suffer. Although many large banks have in recent months announced new commitments to small business, larger banks are traditionally less flexible about lending decisions.

Lending isn’t the only area where small businesses could feel a financial pinch. Fee increases are likely to hurt as well. New consumer protections implemented last year under the CARD Act limit banks’ abilities to charge fees and penalties on consumer credit cards, so banks have made up the difference by raising service fees, credit card processing fees and business credit card fees.

What can you do to protect yourself? CFO recommends small businesses that are close to needing financing may want to seek it now. If you’re ready to switch banks, look for a new one structured to help it fight unwanted takeovers–mutual banks that are “owned” by their customers are one example. And over at BNet.com, Mary Goodman and Rich Rukassoff recommend establishing a relationship with a “backup bank” now. That way, you won’t be taken by surprise if your current bank gets bought out.

Image by Flickr user Nick Ares (Creative Commons)

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Small Business Lending Shows Signs of Stabilizing

March 2nd, 2011 ::

 

By Rieva Lesonsky

While it’s not news that small business lending was down in 2009-2010 compared to its peak in 2008, the good news is that small business lending began to stabilize during that time period, according to the Office of Advocacy’s latest edition of Small Business Lending in the United States.

Although lending to small firms by U.S. financial institutions continued to decline in 2009-2010 period, it did not decline as much as lending to large companies. Lending to small firms dropped by 6.2 percent, but large firm lending declined by 8.9 percent in the same time period.

In terms of the smallest business loans (those under $100,000), loans to small firms began to stabilize in 2009-2010. The total was down by 1 percent during that time, compared with a 5.5 percent drop in 2008-2009, and real estate loans accounted for the entire decline.

“Businesses and lenders continued to exercise caution in borrowing and lending through 2009-2010,” said Chief Counsel for Advocacy Winslow Sargeant.  “As the economy improves, this study, through its state-by-state display of lender performance, can help both small business borrowers and lending institutions see where small firms are beginning to find the capital they need.”

One surprising finding from the study is that small businesses are relying more heavily than in the past on bigger lenders. “Lenders with total assets of $50 billion or more have continued to increase their market share of small business lending,” the report notes. “In 2010, the 34 megalenders held 39 percent of the small business loans outstanding.”

With the GDP on the rise, the Office of Advocacy’s report predicts business lending may follow the pattern of other recessions, in which business lending didn’t really start to expand until recovery was well under way.

Small Business Lending in the United States, 2009-2010, uses data that financial institutions report to their regulatory agencies to compile state-by-state rankings of their small business lending.

Image Courtesy: Karen Axelton

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Banks Reach Out to Small Businesses

February 25th, 2011 ::

By Rieva Lesonsky

I blogged recently on GrowSmartBusiness about new loan programs from the Small Business Administration (SBA). But when it comes to financing, the federal government isn’t the only one reaching out to entrepreneurs these days.

With the worst of the Great Recession behind them, banks are feeling more confident about lending to small business customers, and actively seeking small businesses to lend to. These efforts are needed, because according to a recent report by The Wall Street Journal, the state of small business lending is still pretty dire.

A January 2011 survey by the National Federation of Independent Business reported that 91 percent of small businesses either didn’t want to borrow money or were already meeting all their credit needs. The Federal Reserve reports 10 percent of large U.S. banks have eased lending requirements for small businesses in the past quarter—but nearly 20 percent had done so for midsized to large firms. And Equifax Inc. and Small Business Financial Exchange report that the number of small business loans and lines of credit granted in the third quarter of 2010 had declined more than 70 percent compared to before the recession started.

With entrepreneurs reluctant to borrow, banks are trying innovative tactics to “sell” small business owners on loans. Some examples from the Journal:

  • Bank of America launched a software program that makes it easier for its North Carolina branches to offer small businesses credit cards and other financial products. The company has also pledged to add 1,000 small business bankers in the next 18 months.
  • U.S. Bancorp is training employees at many of its locations in supermarkets to make small business loans.
  • Banks are weighting quarterly financials more heavily in loan decisions, looking for evidence of growth.
  • Banks are also considering orders and outstanding sales as factors in the lending decision.

The efforts are paying off at some banks. For example, Wells Fargo & Co. reported its small business loan-approval rates rose 18 percent in the fourth quarter of 2010 compared to the same period in 2009.

Do you need a loan? Many of us learned to get by without outside financing during the recession—and being self-reliant can be a good thing. But if a lack of capital is starting to cramp your business growth plans, now may be a good time to start visiting your local banks and see what they have to offer.

Image by Flickr user Bosc D’Anjou (Creative Commons)

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How Your Personal Credit Score Can Affect Your Business’s Loans

February 17th, 2011 ::

By Linsey Knerl

According to a 2009 report from the IRS, the creation of sole proprietorships is on the rise, meaning that many small businesses are actually a company of one.  While banks like to see businesses with established credit histories of their own, they’re willing to look at personal credit histories of the owners for new companies, especially for sole proprietorships. While there are many benefits to operating this way, there can also be some risk – especially if you are looking to secure financing for a startup or expansion.  Remember these common factors when shopping for your next loan:

Length of Credit History:  Someone with a more established credit history will likely be able to access a greater variety of funding for their small business than someone who is new to the credit game. Old accounts kept in good standing can increase a score overtime, so be sure to keep old accounts open, even if you never intend to use them again.

Age:  With the recent passing of the CARD ACT, young entrepreneurs who want to start a business and borrow money before the age of 21 will have a difficult time without a co-signature from a parent or guardian.  Since many of the brightest startups occur during the college years, this could have a negative effect on the business landscape as a whole.  Establishing a credit score for future loan activity will also be delayed.

Late Payments:  Just one or two 30-day delays having a significant impact to your personal credit score.  Since it takes years for these errors to fall off your history, it is always in your best interest to pay all accounts on time – even early, if you can.  It is recommended that you also check your free credit report annually from all three reporting agencies to guard against erroneous reporting.

Credit Utilization:  Having a number of credit lines available to you can keep your score healthy, provided you don’t use up too much of that credit.  Keeping the percentage of used credit to total available credit to a healthy amount (40 percent or lower) is recommended for maintaining a high score.  Anything above this can lower it to a level that could disqualify you for certain small business funding.

As the credit score rules change over time, the numbers may have new meaning.  A score that was considered “average” just four years ago has more borrowing power in this post-recession economy.  For those who have managed to keep their credit score above a 750 or even 800, the outlook for financing your small business may be a good one.

Linsey Knerl is a staff writer for CreditScore.net. She’s written extensively about personal finance topics, while raising five home-schooled children on a farm. Follow Linsey on Twitter @lknerl.

Photo courtesy: Karen Axelton

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