Small Business Credit: Looking Back and Ahead
Probably the most common question we receive here at SCORE is, “How can I get funding for my business?”
The next most popular is, “Are banks still lending to small businesses?” The first, is a complicated question – its answer is reliant on so many factors including the type and size of your business, your funding needs and timeline, and the collateral (both literally and experiential) you bring to the table. The answer to the second question is a complicated one. Of course, banks are still lending – in fact the budget for SBA loans alone to small businesses in 2013 is $26 billion. That’s a pretty significant number. But the way banks are lending to small businesses has changed pretty significantly since the economic downturn began in 2008.
SMB Lending Post-Recession
Since the housing market crash in 2007-2008, small businesses have faced multiple challenges, one of which is obtaining credit from financial institutions. There has been significant dialogue and anecdotal information suggesting that small businesses have taken the hardest punches, however, a recent study by the Small Business Administration Office of Advocacy reveals some interesting findings and one perspective on some ways in which small business lending has been affected by the financial crises:
- Bank lending for smaller businesses declined significantly more than that of all other firms. Between 2008 and 2011, bank lending for small businesses decreased by 18% while that of all other firms decreased by 9%.
- The growth rate of small business loans from banks that were assigned Trouble Assets Relief Program (TARP) funds was slower than that of non-TARP banks. While TARP was implemented to encourage lending particularly for small businesses, small business loans from TARP banks grew by 7% while those from non-TARP banks grew by 8.4%.
The study also highlights evidence of some of the determinants of business lending:
- Contrary to the arguments made by the banking industry, the analysis showed that there exists a positive relationship between a bank’s level of capitalization and the rate of business lending. What this means is that as the capital standard of banks increase, so does their availability of credit to small businesses.
- There is a negative relationship between bank size and business lending; the bigger the size of the bank, the less likely they are to lend to small businesses.
- There is also a negative relationship between bank profitability and business lending. Unprofitable banks are more likely to take the risk to lend to small businesses so that they are able to gain the subsidy from deposit insurance.
- There is a positive relationship between de novo banks (less than 5 years old) and business lending. The newer the bank, the more likely they are to lend to small businesses.
So if you’re looking for a commercial loan for your small business, keep these factors in mind when choosing the type of bank you pursue as a lender. Lending, while perhaps slowed, is happening, it’s just a matter of finding the bank with the most to gain from your potential loan.
SBA Funding for 2013 to Increase
As I mentioned earlier, at a level of $26 billion in loan guarantees, SBA guaranteed loans represent another opportunity for small businesses to receive crucial funding. According to the recently released 2013 budget for the SBA, “Because small businesses are a major engine of economic growth and job creation, the Budget provides $349 million in subsidy for SBA’s 7(a) and 504 business loan programs. This funding supports $16 billion in 7(a) loan guarantees, (including $2 billion in revolving lines of credit that support $46 billion in total economic activity) which help small businesses operate and expand, as well as $6 billion in guaranteed lending under the 504 program to finance small businesses’ commercial real estate development and heavy machinery purchases. In addition, the Small Business Investment Company (SBIC) program will provide up to $4 billion in guaranteed lending to enable SBICs to invest in high-growth small businesses, through expanded funding authorities.” It’s important to understand that these loans are not administered directly by the SBA but rather “backed” or guaranteed by it. These loans are still evaluated and made by third party financial institutions, which have become more cautious in their lending since the recent economic downturn. To learn more about SBA loans and find one that fits your business, visit the SBA’s Loans & Grants page.
New Loan Alternatives
Earlier this month, one of our many fantastic volunteer mentors, Raj Tumber with our Las Vegas SCORE chapter, offered his insight into the upcoming lending environment and outlined several alternative loans for small businesses to consider. Alternative funding options like crowdfunding have been a hot topic among the entrepreneurial community this past year. Crowdfunding represents an incredible opportunity for entrepreneurs to find financing through a non-traditional forum but its future still remains uncertain. This year will bring legislation concerning the regulation of crowdfunding that may have a profound effect on its usefulness for small businesses. The same applies to small business loans originating from credit unions which will also face legislation this year. With the legal regulations of these two alternatives still up in the air, there is still much uncertainty about their value for small business in the upcoming year.
Become an Attractive Loan Prospect in 2013
Small business funding expert and recent SCORE webinar presenter, Ami Kassar of MultiFunding LLC, boiled down all the advice out there regarding securing a small business startup loan to one simple step: “Get a paying client.” Discussing an entrepreneur seeking to start a high-end security firm he says, “The moment he gets his first contract in place, his company will begin to have real value, and he will have started to prove his basic proposition.” In other words, the explicit and certain promise of future revenues is the best attribute of an attractive loan recipient. Keep this in mind as you evaluate your business’s credit-worthiness and prepare to apply for a loan this year. And remember, that ingenuity you used to develop your fantastic new business concept shouldn’t stop there. Be creative in the ways you think about finance sources and you surely will find it exists for you and your business after all!