Can't Get a Loan for Your Business? I Don't Believe it
I speak to many of my clients each month about how their businesses are doing -- and the health of the economy in general. And to be sure, I hear the usual grumblings about high taxes, slow growth and too many regulations. But you know what I don’t hear? I don’t hear any complaints about getting financing. And there’s a reason for that. The financing environment for small businesses in 2016 is not just good: It’s great. In fact, it’s better than it was before the Great Recession.
Yes, venture capital and angel investing have both recently slowed. But that kind of financing is for a niche of start-ups and tech companies that aren’t truly reflective of small business in America. For my clients - the established small businesses who reside in industrial parks and office complexes around the country and distribute pipes, manufacture film, mow lawns, fix roofs and serve meals - the financing environment is strong. When they want loans to grow their companies they have plenty of options today.
Don’t believe me? Then why, as Forbes recently reported, is Wells Fargo (which releases earnings this week along with other banking giants Citigroup and JP Morgan) calling on those small business applicants that it previously rejected for loans? Lisa Stevens, the bank’s head of small business explained why: “Some people are ready, and others have to become credit ready. We realized that we wanted to be approving more people, and that part of the relationship with the customer isn’t just approving them for loans but being on the journey with them when they get declined.”
Translation: wait, don’t go! Maybe we can work something out!
The story sums up the financing atmosphere for small businesses as we enter the second half of 2016: plenty of capital is available to those that need it. Just look at a few recent facts:
Big banks are lending more: According to monthly index prepared by Biz2Credit, a marketplace for online lending, small business loan approval rates at big banks ($10 billion+ in assets) is now at an all-time high. Big banks this year are approving loans at a 6% higher rate than last, and the approval rating has increased seven of the last nine months. The most recent Private Capital Access (PCA) Index by Dun & Bradstreet and Pepperdine University Graziadio School of Business and Management found that small business access to capital has steadily risen over the past four years. In January, Citigroup said it lent more than $10 billion to U.S. small businesses in 2015, which was 120 percent more than it loaned in 2009. Wells Fargo has set a 5-year, $100 billion lending goal with a new loan program announced earlier this year. PNC Financial Services Group recently announced that it is extending its popular consumer loan programs to now include small businesses.
Alternative lenders are filling in the gaps that big banks can’t serve. The online lending industry has exploded over the past few years, led by firms like CAN Capital, Kabbage, Lending Club and others. PayPal and Square are providing merchant advances for working capital to their customers who qualify based on their cash flow. And other big companies are jumping in: Office supply giant Staples has partnered with Lendio to offer lower cost loans to small businesses. American Express recently announced a planned partnership with Lendio. Chase and alternative lender OnDeck Capital just formed an alliance. Kabbage just partnered with Scotiabank to provide loans to businesses in Canada and Mexico.
The Small Business Administration is booming. According to this report from the Small Business Finance Institute, 2015 was a good year for bankers offering SBA backed financing, particularly the most common 7(a) loans. “SBA lending overall results, as measured by the agency’s monthly approval statistics, finished FY 2015 with better results in every category, but especially rich for 7(a) guaranteed lenders. The 7(a) program "shattered all previous Total SBA Loan Volume 2015 records for total loan volume, and even for the number of loans greater than $150,000. It's 504 debenture volume also "grew for the first time since 2012, hopefully signaling that declining years are behind the program."
Of course, the news is not all rosy. It never is. The PCA survey above also found that small businesses' access to traditional bank loans, while increasing, still lags behind that of middle market companies, which means that many small businesses still rely on personal assets and personal credit for financing. The Biz2Credit report admitted that smaller banks, credit unions and alternative lenders have recently seen a drop in their lending rates due to increased competition from the big guys.
And the costs are much higher for small businesses that can’t get financing from a traditional bank. Online bankers can charge as much as 30-50% annual interest for the loans they provide and merchant financing services can be as high as credit card rates. But the approval process is much quicker, personal guarantees are usually not required and the amounts financed can be as low as just a few thousand bucks – all benefits that a traditional bank cannot provide. And besides, shouldn’t the costs be higher when there are more risks?
So please, don’t tell me that you can’t get a loan for your small business. You can. I understand if it may be too expensive because lenders believe that your business is a riskier investment. However, that’s your choice. Be grateful that you have one.