While inflation is the highest in decades, and workers are demanding higher wages, even in normal times it can be tough for a smaller business to get loans from traditional banks because they lack the assets or credit histories of larger companies.
And in many cases, they lack an understanding of the issues that drive the lending decisions made by banks and other lenders.
KEY DOCUMENTS MISSING …
Revitalization Partners is working with multiple clients that are behind on taxes for multiple years. And in several cases, financial statements lag as well.
And yet, despite this lack of financial data, these companies continue to seek operating loans to continue operations.
TOUGH LOAN ENVIRONMENT …
Only about 30% of businesses that applied for financing last year received the amount they requested, down from about half in 2019.
And the President of the National Small Business Association, an advocacy group, said the current loan environment could make it tougher on smaller businesses trying to recover from the pandemic.
Their balance sheets, which banks use to assess loan applications, were weakened during the pandemic, even if the future looks bright.
14.7% LOAN APPROVAL RATE …
In February, big banks approved 14.7% of loan requests, down from 28.3% in February 2020. And small banks approved 20.5% of loan requests, down from 50.3% in the same month in 2020.
That’s according to the online lender Biz2Credit, based on data from more than 1,000 small business owners who applied for funding on the company’s platform.
The banks’ stinginess has led business owners to consider other options such as community banks and online lenders.
Owners were more likely to apply for an online loan last year than in 2020, while applicants were less likely to seek financing from a small bank, the Fed survey shows.
THERE ARE TRADEOFFS …
There are tradeoffs however: Alternative loans can be easier to get but are likely to come with higher interest rates or steep penalties.
Typically, traditional banks’ small business loans carry interest rates up to 7%, or greater while online loan rates vary widely but can easily be 10% and higher.
We’re in that part of the cycle where credit availability is going to get tighter. The fact that a lot of small-business lending is short-term in nature and often involves floating interest rates could make rising interest rates even more challenging for small businesses that need capital.
CREDIT WILL COST MORE …
It’s going to cost more to get credit. Underwriting standards are going to get tougher because you’re going to actually start seeing delinquencies and defaults, and the banks don’t respond to that by going, “we need to be looser with our money.”
They respond to that with tightening up their underwriting requirements.
A tougher lending environment means business loans will likely come with higher price tags in the coming months, but small-business pros say there are things entrepreneurs can do right now to get lower interest rates on business loans.
NOW’S A GOOD TIME TO …
If you don’t have an existing relationship with a lender, now may be a good time to make one.
It has been suggested that connecting with a local banker who has some autonomy in the underwriting process can make all the difference during a tight credit market.
They know what their underwriters are looking for, and they will do the coaching with the business owner to make sure that the balance sheet looks the way it needs to look,” he says.
A local banker might also look at credit reports and payment histories ahead of time to make sure there are no red flags on your application.
CORRECT, COMPLETE & CURRENT …
To get approval on a business loan, be sure your business’s financial statements and tax returns are correct, complete and current, you’ll have to be able to explain to lenders what each line item means on your financial statements and what story that tells.
You also should be able to explain how the information on your tax returns ties to the information on your financial statements.
And if you don’t have the contacts or expertise, don’t be afraid to ask for help before you ask for the loan.
While occasionally a “yes” turns into a “no”, rarely does a “no turn into a “yes”.
Revitalization Partners specializes in improving the operational and financial results of companies and providing hands-on expertise in virtually every circumstance, with a focus on small and mid-market organizations. Whether your requirement is Interim Management, a Business Assessment, Revitalization and Reengineering, a State Receivership or Bankruptcy Support, we focus on giving you the best resolution in the fastest time with the highest possible return.
