The state of small business lending in the past few years has been, well, dismal. Is there light at the end of the tunnel? The Wall Street Journal recently took a look trends in small business loans, and cited data from financial-services research company Greenwich Associates that half of small businesses report having a harder time getting credit today than the same time last year. Just 15 percent said credit conditions have gotten better. Still, there are some signs that things are improving.
Here’s what the Journal had to say about what helps—and hurts—when you’re approaching bankers.
Helps: Tangible assets. According to lender matching website Boefly.com, companies that own tangible assets (such as real estate or other property) are more likely to be considered by banks. This is true even if they have weaker cash flow or aren’t as creditworthy as businesses that lack collateral. For example, Boefly.com says loan applications from hotels, retailers, restaurants and manufacturers are getting a second look from banks, while companies such as IT providers that typically lack collateral are not.
Hurts: Risky industry. Collateral isn’t a panacea. Many businesses that have lots of tangible assets are also in very bankruptcy-prone industries. These include hotels, auto dealers and businesses involved in construction.
Helps:Reliable industry. By the same token, many businesses that don’t have collateral are in industries that are well known for paying their debts. For instance, Boefly.com data shows that consulting companies and professional, scientific and technical services companies are among the top industries most likely to pay back debts.
Really helps: Strong sales plus collateral. According to the Journal, you’ve got the best chance of landing a loan if your business has collateral to put up and is also showing strong sales.
While that may be true (and it’s also kind of obvious), I think all of us can name at least one business we know of that’s tried to get a loan in the past few years and been denied despite robust sales and tangible collateral. (The Journal cites an example itself.) The reality is, there’s no magic formula for getting a loan. Banks are under intense scrutiny from federal regulators that is making them play strictly “by the book” when it comes to measuring risk—which is why factors like industry norms may seem to count for more than the reality of your business’s facts and figures.
But although it’s harder, businesses are still getting loans—the SBA has made it much easier to do so. And with the economy improving slowly, I do believe things will only get better. To boost your chances of finding financing, no matter what your situation, enlist a SCORE Mentor to help you with your business plan and loan documentation.