Securing Small Business Financing in a Post-Recession World
Many small businesses dealing with lower sales during the recession also found their access to new financing was limited. As the economy begins to rebound, companies looking to expand and grow may have more opportunity to secure financing now that lending approval rates are on the rise. Traditional banks, institutional lenders, and online marketplaces are all upping their game and increasing the availability of small business financing.
Need a Big Loan? Try a Big Bank
According to a recent article in American Banker, big banks’ approval rates for small business loans were 21 percent higher in December 2014 than the same month one year prior. But the types of loans granted by large banks may not be a good fit for every small company; larger banks tend to offer larger loans, and in some cases, may not even consider loans below $100,000. In some cases, this is much more than is needed by a small company looking for assistance with cash fluctuations. Yet, if an outsized opportunity arises and a large amount of financing is needed, big banks provide solid financial backing and often become a trusted partner for growing companies.
Institutional Lenders Offer Alternatives
When shopping around for small business financing, institutional lenders may not be the first funding source that comes to mind, but organizations such as insurance companies, hedge funds, and other non-bank lenders are increasing their small business loan volumes. Many lenders in this category offer attractive terms with a healthy approval rate. Also, according to American Banker, institutional lenders offer a different product mix, including loans with longer terms and lower interest rates.
For a more personalized approach to lending, try a local community bank. Often, the lending officers will take the time to get to know their clients personally. For smaller-sized loans, small banks can offer attractive terms or products which bigger banks may not want to spend the time working on. Partnering with a small bank may also help small businesses with other banking needs, such as checking accounts, business credit cards, and merchant services. Small banks are small businesses as well, so they may be able to better understand your financing needs. One potential drawback of small banks is they are less able to handle increased risk compared to larger, more diversified lenders. As a result, small banks might have stricter credit standards.
If a company fails to qualify for traditional small business financing, other opportunities may be available through the Small Business Administration’s loan programs. Small businesses meeting the SBA loan requirements can secure financing which is partially guaranteed by the agency. This guarantee lifts some risk from the lender. In addition to SBA loans, small companies may also apply for loans given by other governmental agencies or regional organizations committed to fostering local business development.
The Internet has increasingly become a source of funding for small businesses. Peer-to-peer lenders pair private investors with small businesses in need of financing. Newer lending companies are creating their own models to assess small business risk, which differ from the typical credit scoring models used by banks. Small business owners should proceed with caution and thoroughly research any online opportunities. A recent white paper authored by Karen Gordon Mills and Brayden McCarthy of Harvard Business School studies the new Internet marketplace and discusses some of the regulatory impacts which have not yet clearly been addressed.
Thanks to overall economic improvement and technology advancements which improve lenders’ ability to assess risk, today’s small businesses have more financing options available than ever before. Generally a small business financing relationship is about more than just passing money back and forth; done right, it can lead to increased business volume and a trusted alliance, so be sure to choose wisely and think long-term.