How to Navigate the Turbulent Waters of Small Business Loans
BY: MEGAN TOTKA ON MONDAY, DECEMBER 16, 2013
Small business lending has gotten so confusing for most people that no one seems to truly understand what’s going on with it right now. So, what’s the story? Average people are at a loss, small business owners and entrepreneurs are scrambling, and even the experts can’t agree on things like a simple definition of what constitutes a small business.
This is bad news for the American economy. What’s worse—it may not get any better for some time to come. But, if small business owners and entrepreneurs routinely gave up in the face of a struggle, they probably wouldn’t have gotten as far as they already have in today’s world.
Even though small business lending is in a state of crisis (we think, but we can’t be sure), there are still ways to carefully navigate your small business ship down the river of success.
Before we discuss the specifics of what small business owners should do to actually secure small business loans, first let’s look at what needs to improve to make the whole lending situation better.
The House Small Business Committee met in early December to analyze the ‘post-recession,’ small business lending environment. There were more than 20 different studies and sources of data used to present information to the Committee, but the biggest problem was that every single study or source cited a different definition of a small business.
What does that mean? It means that any conclusions drawn from these data sources are pointless, because it’s impossible to accurately measure how small business lending is performing when no one agrees on what makes a small business… well, small.
Once we have a proper definition that the majority agrees on and we know how to classify small businesses as such, then we can begin to determine how much money is being lent to whom, and where it’s coming from.
Until then, unfortunately, much of it comes down to guess work.
A Whirlpool of Small Business Lending
With all the hubbub over the Affordable Healthcare Act and small business cost increases over the last year, it’s no wonder that there seems to be mass confusion at hand in the world of small business financing. Many small business owners are all too aware of the fact that bank lending to small businesses sort of disappeared during the financial crisis, and it has yet to return, at least in any way that mirrors how things used to be.
Higher lending standards have made room for alternative lending options to prosper, the majority of which offer money in exchange for a gargantuan interest rate. So, you can still get a loan as a small business, but the problem is that it will cost you much more than it should in the long run.
Small businesses in New York, New Jersey and Connecticut may benefit from the recent VEDC (Valley Economic Development Center) initiative that includes a $20 million dollar fund targeted specifically at small business lending.
But what of other small businesses that are far away from the East Coast? Where does that leave them?
The Best Way to Secure a Small Business Loan
It’s almost common knowledge that in 2013 banks are less-than-excited about financing what they deem as ‘risky ventures,’ and these days, it seems like they tend to focus on financing larger, supposedly less risky and, of course, more profitable options. Good for them. But, that doesn’t help small business owners secure small business loans.
We briefly discussed alternative lending options for small businesses, which are risky because of the incredibly high interest rates, but WAIT before you go the expensive route. After all, your business is small for a reason, and you likely won’t be able to easily pay back a loan with unrealistic interest rates.
To secure a small business loan from a bank, you need to understand what the banker wants, what they are looking for.
Here are 5 things your banker will want to know before lending to your small business:
- Do you have a good credit score? Most banks admittedly have a credit threshold that they won’t go below, because that would put them at risk, which is understandable. They also cite credit score as the main indicator of someone’s willingness to meet their financial obligations. Especially for the smallest small businesses, credit score is immensely important, and anyone asking for a loan should be ready to discuss their score in detail.
- Does your business have good character? Meaning, do you run your business that way it SHOULD be run, and do your best to meet all of your obligations? Do you have a good management team that stays on top of things? Hopefully you do, because that can only help the impression of the banker who will help determine whether or not you’re eligible for a loan.
- What is your capacity for repayment? If you’re in the early stages of getting your business off the ground and lack revenue, chances are traditional lenders will be pretty unwilling to work with you. Another option is reaching out to family and friends, especially if you’re eager to get things moving.
- Do you have capital? We all know the saying, "you’ve got to have money to make money," right? Well, that’s very true in the sense of small business lending. Banks would much rather lend to someone who has a little extra, just in case.
- What is your collateral? This is where real estate, capital equipment and other significant assets come into play. Owning assets shows that if the worst happens, you still have equity to fall back on.
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