Are you ready to bet on positive trends in your sales and profits, and do some hiring to grow your business? Or would you simply like to finance a major sales campaign requiring extensive travel?
If you’re deciding how to finance your company, you’ll see that the small business credit environment is still very challenging for both startups and established small businesses, even as funding challenges have started to thaw in the wake of the 2008-2009 financial crisis.
“The small-business lending trend is up, but from a very low level,” says Ira Davidson, director of Pace University’s Small Business Development Center (SBDC) in New York. SBDCs, an arm of the US Small Business Administration, help small business owners to arrange government-guaranteed financing with commercial banks, including SBA programs to finance small businesses.
Increasing Loans to Small Business
The banks themselves assert that they are helping fuel the economic recovery by boosting small businesses’ access to credit. Some 85 percent of small-business owners say they have access to the financing that they need, says a March survey by Capital One Bank. That’s an increase of 15 percentage points from a year earlier. And SBA-backed loans by Cleveland-based KeyCorp were up 11 percent in the first quarter of 2011 compared to a year earlier, according to a Wall Street Journal report.
Entrepreneurs are likely to be turned down by banks that believe the loan can’t be fully secured, or that the business model doesn’t offer a clear path to repayment. “Simple deals go to bankers; SBDCs get the tough deals,” says Davidson. “We’re sophisticated in evaluating and fixing potential deals.”
Still wary of issuing bad loans after they made so many in the 2000s, banks are examining the fine print of business plans more closely than they have in a long time.
“There’s a trend away from black-box credit scoring, and a return to traditional financial measures: balance sheets, profitability and so on,” says Davidson. “And borrowers now listen when you tell them, ‘You have to clean up this submission before you even go to a bank.’ ” The Federal Reserve Bank of New York offers a crash course on the credit process for small-business owners.
Wine Entrepreneur Goes to Economic Development Agency
“I used my own resourcefulness to find a bank,” says Paul Common, a former Wall Street professional and the founder of Uncorked Wine Co., which he hopes will be granted a liquor license to open a Manhattan store in July 2011. “I managed to secure a loan from the New York Business Development Corporation, and I put up the other 50 percent myself. The approval process took about four weeks after I submitted my financials and a very thorough business plan.”
Indeed, Common’s approach appears to be typical of entrepreneurs and of owners of going concerns, many of whom must turn to local or state economic development agencies or the SBA to obtain loans.
As a promoter of the labor economy, NYBDC “liked that I’m going to hire 2 or 3 employees,” says Common. Approval of the liquor license -- a fishing expedition that comes with big legal bills -- is just one of about 18 preconditions for the closing of his six-figure loan. Common will make interest-only payments for the first six months of the loan period -- a welcome feature for a startup -- but must complete repayment in 7.5 years, which is the length of his lease on the store.
Software Company Has Trouble Finding Money to Grow
Janice Nicholson has been frustrated in her pursuit of credit as president and co-founder of i2i Systems, a 20-employee healthcare software firm in Santa Rosa, Calif.
Even as her 11-year-old company has matured, Nicholson has found financing to be expensive and often elusive. “None of our credit is based on the company, even though it has $3 million in sales and $1 million in steady recurring revenue,” says Nicholson. “All banks want the loan to be guaranteed by my personal assets, even with business loans backed by the government.”
For countless entrepreneurs, the long decline in home prices, which continued into the first quarter of 2011, has reduced home equity that might serve as collateral for a business loan.
Revolving credit for everyday operational expenses has become more costly since the financial crisis, Nicholson says. “We give our trainers and salespeople credit cards for their travel expenses.”
Through the last few tumultuous years “we’ve kept our credit cards, but the annual fees and interest rates have gone way up.” Various online resources allow you shop and compare some of the better values in credit cards for business.
“This situation is pushing me to think that the only way I can move my company forward is to take on investors and give away a large portion of the company, or find a friend or family member to loan me the money,” says Nicholson.
Still, some are bullish on the credit environment for people with a dream that translates to a solid business plan. "If there’s a good idea for a startup, usually there’s lending available,” says Davidson.