Once the great recession hit in 2008, companies of all sizes either saw their current financing situation turn south (banks and other lenders pulling back or canceling credit lines) or were just unable to get new financing. A trend that continues today.
However, over the last couple of years, there has been some pressure put on these lenders to increase the amount and number of small business loans they actually do put out each year.
The Small Business Loan Conflict
Today, in fact, banks and other similar small business lenders claim that they have loosen their lending standards for business borrowers but that, and here is their key point, that business borrowers just are not all that creditworthy – given poor credit histories, low value collateral and weak cash flow.
Business borrowers on the other hand claim that banks just will not provide them any type of small business loan even if their businesses are growing strongly with solid cash flow and given the fact that collateral values are beginning to rise once again.
To combat this, banks are now claiming that they have been increasing their small business lending – two key players, Citi Bank and Wells Fargo, in fact, claim that their small business lending is, once again, approaching their pre-recession levels – although most of these small business loans are going to companies that are at the upper end of the small business category.
However, most small business owners are calling foul and are attempting to find alternative financing sources that focus more on their business performance than on things like their personal credit report or their current personal and business debt ratios.
An Alternative Solution
To really get a bank or other small business lenders to provide you with the capital your business needs to start, grow and prosper, then you essentially have to play along with their game – which means re-positioning your business to meet their current lending policies.
So, if they state that your business does not have enough cash flow to support a loan, then you have to work at reducing costs (expenses) while either maintaining current revenue or increase revenue levels.
If they say that your collateral value is not up to par with their policies, then you have to find a way to either increase your collateral value or add additional collateral.
But, what happens if they say that your personal credit score is below their threshold or that you have too much current debt – personally or in business?
Well, just like all those other problems, if the banks or lenders claim that your debt ratios or credit history is bad – then you just have to simply fix it.
The Good News
The good news here is that, unlike improving revenue or cash flow or boosting collateral value, when improving your credit history or getting your personal or business debt under control, you do not have to do it alone.
If you need to improve revenue – no one can help you do this as this is strictly between your business and your customers. If you need to improve collateral value, again that is only up to you. But, if you need to improve your credit report or get your debt and all those monthly payments under control, there is help.
Now, most small business owners, in the beginning, will use personal resources to start and grow their businesses. This includes using unsecured loans like credit cards as well as other consumer loan products like unsecured personal lines of credit or home equity loans. The goal here is to use these personal resources until the business is strong enough to stand on its own and seek other, outside financing – business loans – when it is needed.
However, in running the day-to-day operations of a growing small business, these personal debts – even when used for business reasons – can get out of control.
Thus, the business owner tends to have three options to reel in those debts and get them back under control.
- Do nothing and continue to waste revenue and profits by making those huge monthly payments and paying all that interest to their benefit and not yours.
- Re-negotiate your outstanding debt. Now, you can do this on your own and talk with all your creditors and try to get them to reduce your principal amount outstanding to include waiving interest and fees or you can get some experts to help you with this – help from those that know what to say and have the skills to get what you want.
- (Note: Re-negotiating your debt will adversely effect your credit report or credit score but will also help you lower your monthly payments, lower the overall interest you pay and allow you to get a better handle on your remaining debt.)
Your best option – is to consolidate that debt. You can get a single loan – with a single loan payment (a payment that can be more affordable) – at a better interest rate. Thus, with this single consolidation loan, you pay off all those other creditors – which will improve your credit score as those accounts will show ‘paid-as-agreed’ – but more importantly you will be able to better manage your debt and get it paid off faster – with less of a burden to you.
Here is a simple example:
You have five credit cards (these can be business credit cards or personal credit cards) with a total outstanding balance of $25,000 and interest rates ranging from 18% to 28% – now, if you just pay the minimum payment amount, these cards can take years – even decades – to pay off with the vast majority of your payments going to interest. Thus, your $25,000 in debt could actually cost you $100,000 or more before being completely paid off. Add in a personal term loan of $15,000 with interest at 15% and a ten year, $30,000 home equity loan and it would seem that all you are doing is working hard to pay your lenders and not yourself.
But, let’s say you consolidate all that debt into one single loan of $70,000 at an interest rate of 12% – not only will you pay less in interest and fees over the course of that loan but you can have it paid off in half the time.
And, the important part, having that lower monthly and better control over your debt will make you and your business that much more attractive to getting your small business loan request approved.
One of the biggest down falls of small business borrowers is their personal credit. Even those borrowers that tend to pay on time and as agreed may fall just a bit short. It use to be that borrowers needed a FICO credit score of 640 or better. However, today, those scores need to be 720 +. Not an easy task with a lot of debt and just being able to make minimum monthly payments – especially when all spare cash is going to start or grow a small business.
The main things about credit scores are as follows:
- Make all your payments on time.
- Keep your outstanding debt at 20% or less of your credit limits. Example: If you have five credit cards with $5,000 limits each for a total of $25,000 in potential credit then you should only be using (have outstanding) $5,000 in aggregate. Any more then that and the credit agencies think that you are abusing your credit.
- Lastly, have a strong mix of credit accounts – from unsecured revolving accounts like credit cards to term loans – like car notes and home loans.
Again, wading through the task of improving your personal credit (and all lenders will use your personal credit in their decision) can take a lot of your time – time that really needs to be spent on running and growing your business. Thus, seek help from those that know how to get your credit back on track and how to do it quickly so that you can re-submit your business loan application for a second (and hopefully final) look.
While many banks and other small business lenders are actually lowering their business loan standards – backing off some of their most strict underwriting guidelines – it is still not easy to get a business loan today.
Thus, in order to actually win the capital your small business needs, you have to constantly re-position your company to meet those lending standards (as banks and other lenders will not change their standards to fit your business – you have to change to fit theirs).
Now, most of the problems that lenders have issues with in your small business are up to you and you alone to fix. But, not all of them.
If your credit is sub-par (a nice way of saying bad), then you have to get it fixed and get it fixed quickly. If you have too much debt (personal, business or both) then you have to get that current debt under-control and better manage it – not only will this help get your new business loan request approved, but it can also help you improve revenue and (the best part) profits in your company (not having to make those monthly loan payments with all that interest expense included).
If you are unsure on how to proceed or just do not have time to get these issues under control, then get help as getting that help will only help you in the long run.
The bottom line is this. If your potential lender is saying ‘NO’ to your business loan request and giving you a reason or two for that decline – then get those reasons fixed and then ask them to take a second look. Regardless of the outcome, the one that will benefit the most from all of this is you.