Small Business Loans Tricky to Secure During Credit Crunch

According to a recent survey by the New York Stock Exchange, more than half of small businesses cannot get access to the credit they need. As a result, two-thirds of these small business owners do not expect to add jobs in 2013. In light of the ongoing credit crunch from the Great Recession, small business owners have to refine their borrowing strategies in order to increase their chances of finding the funding to continue growing.

The credit crunch has hit small business owners especially hard in recent years. Another survey by the Federal Reserve Bank of New York recently found that only 13 percent of small business owners who applied for credit received the full amount they requested. Often, banks will restrict loan amounts to 25 percent of yearly gross revenue and devalue small businesses’ financial statements by as much as 30 percent. Even Small Business Administration loans have become arduous – borrowers often have to wait for a separate valuation of their business by the SBA even after the borrower has already paid for a professional valuation and their bank has approved the loan.

A small business needs to do serious research and present itself in the best possible light when applying for a loan in the current market conditions. In the past, small business owners were advised to cultivate a close relationship with only one financial institution. Although it remains true that small businesses should continue to cultivate those relationships, they should also look to other lenders – especially in this climate. Flexibility and a backup plan are vital for small businesses, and competitive pressure on lenders to give the business a good deal can only help.

Small business owners can research lenders in their area by asking for borrower references, talking to people who have done business with the lenders in the past, finding out how different lenders perform at simple services such as processing payments, and getting opinions from other customers about a bank’s flexibility. Loan brokers, financial advisers, accountants and local attorneys can all share valuable information as a result of their working relationships with multiple lenders.

A small business should also make sure its own affairs are in order before applying for a loan. Every business needs a carefully articulated business plan that will help reduce a lender’s uncertainty about the level of risk. The owner should also be prepared to explain any past credit blemishes that could be an issue. It is always better to be proactive about past difficulties – identify the problem and explain how you survived it. Turning past difficulties into a success story instead of a failure will encourage a potential partner to share in the firm’s future growth.

A small business owner should also be prepared with a statement explaining the owner’s personal financial status. Lenders will be interested in how much money the owner is personally willing to invest in the business, including as collateral for a loan. This will show the owner’s commitment to the enterprise and will help the lender assess the amount of risk. Lenders will also evaluate the owner’s experience, background and expertise as part of the risk evaluation.

Small business owners must be aware of their credit rating and attempt to repair any credit blemishes before applying for a business loan. They should have financials, cash flow projections and past business tax returns available for examination. Finally, with lenders being so cautious about risk, small business owners ought to anticipate site visits by prospective lenders. Make sure that financials are in order and work spaces look professional. In addition, lenders today will check social media on prospective borrowers as part of their risk assessment. Owners have to ensure that Twitter and Facebook accounts reflect favorably on their business.

Today’s business climate is especially difficult for small businesses. But with a few common sense steps and thorough preparation, small business owners can get the credit they need to succeed and grow their business. Professionals are available to help get a firm’s house in order and provide valuable advice. 

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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