Commercial and industrial lending is increasing for larger companies, but according to the Thompson Reuters/Pay Net Small-Business Lending Index, the number of traditional bank loans to small businesses has fluctuated wildly over the past year.
And, let's face it, small-business owners remain uncertain about what 2013 holds for their business and the economy. In fact, in its latest report the National Federation of Independent Business confirms that small-business optimism remains relatively low.
"The good news is banks want to make small-business loans. It's just that many banks are not able to properly scale their resources to include all deserving borrowers, even if small-business owners do meet the stringent standards set by lenders," says James Walter, founder and CEO of BBC Easy, a provider of automated loan management software for financial institutions. "The fact is many banks are using outdated technology, so the more organized you can be, the more quickly you can be approved."
If your business needs credit to grow or a temporary infusion of cash, receiving a loan may be difficult in our still-recovering economy. There are important variables in play when banks evaluate your creditworthiness. Walter and BBC Easy's co-founder, Corey Ross, offer these tips to increase your chances of securing a loan.
1. Get your financial house (and documentation) in order.
Typically, a business needs to have been profitable for the past three years in order to qualify for a bank or SBA loan. Since most lenders will look closely at your credit history prior to making a decision, keep an eye on your credit score and anything in your credit report that might be a red flag.
Remember, most banks will require that you personally guarantee the loan, but if you have sufficient collateral within your business to cover the loan principal, they shouldn't require a lien on your home.
2. Tell your company's story.
"In my prior experience as the co-founder of a lending company, one of the most basic errors made by loan applicants was not telling me why their company needs the money. And they wouldn't reveal why we should approve the loan even though their company doesn't meet our minimum standards," says Walter.
Is your industry experiencing growth? Are you scheduled to partner with a major retailer? What's your story?
"Don't just say you want a loan, turn in your documentation, and expect the loan officer to rubber-stamp your request," adds Walter. "Fine-tune your business pitch to include your future prospects--not just highlight past successes."
3. Go local.
A national bank is less likely to hear you out if your business hasn't been profitable for the last three years. It is also likely that your company will be passed over if you are lacking sufficient collateral to secure a loan.
"Visit a community bank and also inquire about SBA loan programs," suggests Ross. "Since up to 80 percent of a business loan can be guaranteed by the government under the SBA program, some banks may be more lenient. The downside to this route, of course, is the lengthy paperwork and delay in securing financing due to bureaucracy."
4. Look at alternative financing for short-term needs.
Alternative financing is on the rise as historically profitable or growth-stage companies face shortfalls in cash flow.
"Asset-based lending and factoring are good bridge financing avenues for many small businesses," says Ross.
With factoring, a company sells its accounts receivable to receive a short-term loan of up to 80 percent of its value. Asset-based lending is more comparable to the traditional loan process, where a lender will evaluate accounts receivable, inventory values, and fixed assets to determine creditworthiness, and issue a line of credit. If you don't qualify for traditional bank financing, look at these alternatives, but expect interest rates on these types of loans to be at least double what you'd pay for a traditional loan.