Ever since the recession started in 2008, business commentators and financial analysts have been telling the American public how hard it is to get a small business loan. They say accessing business credit – whether in the form of loans, business credit cards, or working capital advances – is practically impossible without an impeccable credit history. The problem is, most small businesses owners haven’t had time to build a credit rating for their company and they end up financing their business using personal assets, hence the belief that only wealthy Americans can start their own business.
The facts about small business lending
Contrary to what the media would have you believe, it’s not impossible to access business credit or capital, as several small business associations claim. The reality is that they cannot access the type of credit they want at their desired terms. Business owners were “spoiled” by the loans that were available between 2004 and 2008 and they became accustomed to that “easy credit” that came from relaxed underwriting standards. This business climate allowed even the riskiest business loans to go through, allowing individuals and business owners to get funding when many of them wouldn’t have qualified for credit in the first place. Similar to what happened with the housing market, business borrowers couldn’t pay back the loans and this ultimately led to tighter qualification criteria.
Prior to 2004, business loans were neither easy nor difficult to obtain. Banks simply followed their standard loan underwriting protocols, which meant that those who should have qualified were given a loan, and those that shouldn’t have qualified were declined. Makes sense, right? Then a practice began throughout the banking industry where lenders would underwrite risky loans just so they could collect the processing and origination fees. These loans were later sold off to investors, where more fees would be collected, so there was no real risk for the bank. Obviously, these loans should never have been made and they added too much toxic business credit to exist, resulting in the near-collapse of many large institutions.
Now that the market collapsed, business loans have gone back to their normal pre-2004 underwriting standards, meaning that there will be business owners who cannot access business credit. But one could argue that the 41 percent who cannot secure a loan would not have qualified for one anyway. These same business owners don’t understand why they cannot get the same loans they got five years ago, or why their business lines of credit have been slashed.
What are banks looking for from business owners?
There is no doubt that banks and other lenders have different credit standards than they did in pre-recession days, but they have returned to where they should be, where they can offer the most protection to both the lender and the borrower.
Banks and other business lenders will no longer modify their policies to fit your business just so they can charge you fees. They won’t offer you a higher loan amount or lower rate with no collateral or personal guarantee. Private lenders and banks are looking for two main items when they underwrite a loan: 1) Your willingness to repay based on your prior history of paying other creditors, and 2) Your ability to repay the loan from current financial assets or proven cash flow such as accounts receivables or purchase orders.
Once they’ve satisfied these two basic issues, they will look for ways to mitigate outside risks. This may include an examination of your industry as a whole, any changes to the business, or other factors that may impact the long-term health of the enterprise. It may entail requiring personal guarantees or a collateral position, but all of these are ways to reduce risk for the lender.
What’s the bottom line on business lending?
Business lenders are not playing “hard to get,” nor are they trying to make life miserable for budding entrepreneurs. Loans for small businesses were just too easy to get a few years ago and now they’ve come back to where they should be in terms of difficulty.
If you want a business loan today, you need to first understand why outside capital is needed and how your business can best leverage itself to obtain these funds. For the resourceful small business owner, there are many ways to obtain business capital, and none of them are harder to get than they should be.
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