WILL BANKS LEND TO SMALL BUSINESSES?

A survey released this month by the Federal Reserve found that about half of U.S. banks are tightening their standards on loans to small firms; compared with about 30% that reported doing so earlier this year.

According to Business First News, up to May 2, the number of 7(a) loans approved by the SBA was down by more than 19% this fiscal year compared with the same period a year earlier. For those who are unaware, the 7(a) SBA loans are a popular source of working capital for small business owners: the popular SBA express and community express loans fall within this category. These loans offer long terms and low monthly payments and depending on which one achieved, (i.e. the SBA express) the business owner is usually not acquired to produce documents (like tax returns or business sales documents).

So what could be done about all of this in a declining economy, when even Christine Barry, a research director at Aite Group (financial services consulting firm) feels like, "it's absolutely harder for small businesses to get credit today?" Well, Senator John Kerry, Chairman of the Senate Small Business and Entrepreneurship Committee, feels like this survey by the Federal Reserve, "underscores the need to pass legislation to lower fees and stimulate lending for the largest source of new jobs: America's small businesses." The problem that some have is that these fees cover default and program costs for the SBA; but the same lower fees would then encourage more community banks to make 7(a) loans.

So what do business owners think about all of this? Well, a net 15% of large U.S. banks reported loan demand from small businesses had declined. Small business owners are cynical of bank-loan approval and are finding other methods to finance their ventures. However, banks are still lending; just with stricter lending criteria and higher rates and fees.

My advice for times like these: if all else fails, look for smaller community banks and credit unions. Although their rates may be higher, they tend to have a lower "large percentage of damaged loans" to recover from. Also, credit unions and small community banks newly opened will tend to have different underwriting methods--they might not judge your credit application simply from a computer-based standard; they could include an actual evaluation-based-method. You might even see a couple of underwriters strolling around their branches (something you will not see in a big bank atmosphere). There are also social networks out there (Zopa for instance) that have acquired more "out-of-the-box" methods to give small business owners what they need. Lastly, try to obtain credit cards to help fund your immediate cash-flow needs and use them wisely. Pay off a good sum each month and let the credit bureaus analyze how much of your balance you use each month versus how much you pay off. Remember, continue to build your business credit even in these tumultuous times.

To get more information on the survey, go to: federalreserve.gov

Comments? Post here...



Cheryl Isaac is the author of this blog and the Chief Executive Officer of Isaac Business Services