Small business lending changes
Thursday, June 24th, 2010
The financial reform bills currently in Congress are being reconciled in conference in hopes of passage by July 4. Also in the works is an appropriation of $30 billion for banks to lend to small businesses. But will small businesses see that money? Is that what they need to survive the recession? The metrics to answer these questions, and thereby allow Congress to craft legislation that does what it intends, range from hazy to nonexistent, according to this report from Bloomberg BusinessWeek. Bank data indicate that while overall lending fell over the past two years, lending to small businesses fell more than twice as much. Because banks are not required to report small business lending in detail, no one can tell whether the reason is the banks’ unwillingness to lend, the companies’ poor creditworthiness, or a lack of demand for small business loans.
We are hearing now from some banks (not all) that they have money to lend to creditworthy companies with good histories and solid plans for using the money (such as commercial real estate with leases already in place). Their credit analysts are beginning to listen again to the stories behind the numbers rather than focusing solely on whather the loans will pass muster with the regulators. We are also hearing from business owners who would much rather have more revenue than more borrowed money that they are not sure they can pay back in the current economy.
Those business owners who are applying for commercial credit are finding a higher level of scrutiny into their personal financial hstory, as this article explains. Because small business loans are often granted subject to the personal guarantee of the owner, lenders are placing greater emphasis on subjective measures relating to the owner’s character. They are going back to the old days when the banker’s mantra was, get to know your client as a person before you decide whether to extend the loan. These days, they have plenty of ways to quantify creditworthiness, but that one-to-one relationship is becoming important again.
If you are considering applying for credit, here are some things to remember:
- Deal with a banker who knows you (let’s hope you’ve already been working on this one).
- Work up a detailed plan for how you will use the money and how this use will increase your capacity to pay back the loan.
- Have your business and personal financial ducks in a row. Check your credit reports and make sure they are accurate.
- Organize your tax returns and other financial information so your lender has a complete, easy-to-follow set of data.
- Try to anticipate the lender’s questions and concerns so you can respond without being caught off guard and convey the sense that you are aware and in control.