Approval rates for small business loans have recently experienced a decline, along with small business loan requests. In times like these, it is important for small business owners to follow best-practice guidelines to maximize their chances for loan approval. Efficiency, cash flow and credit scores are areas that a small business owner can potentially improve upon. Using the Internet as a research tool to seek out the best loans can also be quite helpful.
Relatively few banks received money from the Treasury Department’s $30 billion Small Business Lending Fund. Additionally, the Labor Department’s July 3 jobs report reveals that a paltry 18,000 new jobs were created in June 2011. This indicates that small businesses, which account for the majority of job creation in the economy, are still struggling.
Some banking experts explain that the slowdown in small business lending is due to lack of demand. This is only partially true. There is pent-up demand, but many owners of small companies are reluctant to take on additional debt when the outlook for the rest of the year is gloomy.
Larger companies usually have cash on hand to reinvest in their enterprises, and corporations can issue more stock to raise capital. Startups and growing businesses do not have those resources, and the bank and non-bank lenders they rely upon for funding are increasingly setting the bar higher when approving loans. In fact, the Biz2Credit Small Business Lending Index discovered that approval rates for small business loan requests continue to drop at both large and small banks. Small business loan requests at big banks (institutions with $10 billion+ in assets) dipped from 9.4 percent in May 2011 to 8.9 percent in June 2011. Loan making at smaller banks also fell from 44 percent in May 2011 to 42.5 percent in June 2011.
The analysis also identified the top five reasons why small business borrowers have not received funding:
- More than 60 percent of small businesses reported that their revenues fell by greater than 7 percent during the first 6 months of 2011.
- Profitability declined at more than 90 percent of small businesses over the past two years.
- Banks are increasingly unwilling to approve loans for companies in business for less than three years.
- The expiry of SBA guarantees made loans more expensive.
- Avoidance: Small business owners believed that they were unlikely to get loans and that the process takes too long.
What can be done to kick-start small business lending?
On a national level, it would be ideal if the government restored the 90 percent loan guarantees to small business lenders. It is currently reduced to 75 percent, due to a decrease in the Small Business Administration (SBA) budget. The SBA is quite effective in supporting small businesses and SBA loans can provide the cash infusion that many expanding companies need for growth.
It's not all gloom and doom! Here's where small business owners need to focus their attention:
1. Run lean, efficient organizations to help increase their profitability
Staff accordingly for slow periods if you have part-time workers. For instance, there is no need to have extra waiters on at lunchtime if two can handle the load efficiently. Times are tight, and workers are aware of it.
2. Take action to increase cash flow and their credit scores
You can sometimes kill two birds with one stone by paying invoices up front in return for pre-payment discounts. This can prevent black marks on your credit record for late payments and can help with the cost of inventory. If possible, try to cut the cost of existing lines of credit and working capital to free up cash flow. These measures can help increase credit scores, thus improving the chance of securing a small business loan.
3. Leverage the power of technology to help find funding
Platforms such as Biz2Credit can easily connect borrowers with lending institutions that they might never have thought to approach. Frequently, these lenders can offer funding at more attractive interest rates than the big banks. Biz2Credit also offers a BizAnalyzer tool, which calculates cash flow and benchmarks against the industry average and lenders’ loan criteria. This is especially valuable at a time when entrepreneurs are routinely rejected for loans by their own banks. Using the Internet saves time, money and resources.
OPEN Cardmember Ramit Arora is CEO of Biz2Credit, which connects small business owners with 400 lenders, credit rating agencies and service providers. In June 2011, he was named “Top Entrepreneur of 2011” by Crain’s New York Business.