(This column originally appeared in the Philadelphia Inquirer)
Banks are cutting back on loan approvals to smaller firms, according to financial services firm Biz2Credit, which surveyed more than 1,000 small businesses.
“The instability in the banking system goes well beyond the recent collapses of Silicon Valley Bank and Signature Bank,” said Rohit Arora, the company’s CEO. “While we do not have a full bank run yet, these developments hurt the banks’ ability to lend to small businesses.”
Arora says that the “ever-rising” cost of capital is complicating the financial woes of small firms.
“The Fed recently raised its base lending rate … to a range of to 5% to 5.25%,” he said. “While the central bank is signaling that this may be the last increase this year, right now, interest rates are at their highest levels since 2007.”
Yes, it’s harder to get financing, particularly if you’re a small business. But the money’s still out there if you make the right moves.
Kevin Lewis, CEO of Premisien Credit Counseling in Philadelphia, says that many businesses miss out on financing because bankers don’t understand them. He also says that many businesses — particularly businesses owned by people of color — are also in industries or areas that banks unfairly deem to be “unbankable.”
“Many small businesses, and particularly African American businesses such as my own, struggle with access to capital,” he said. “My business, for example, is routinely denied lending because the banking industry labels me as a ‘subscription credit repair business’ instead of a fintech company that helps businesses get access to capital. Some of my clients in restaurant, trucking and self-care industries have been struggling to get financing even when they have strong financial statements.”
Lewis says he sees this dynamic is happening across the country.
“Small business owners are misunderstood and underserved,” he said. “Bankers need to be educated.”
His advice is for small business owners to be as open and forthcoming as possible with both their existing and potential banking partners.
I’ve also found this to be true. My most successful clients meet proactively with their bankers. They openly share their numbers and discuss their issues. They do this because they understand that the more information their current and prospective banking partners have about their business, the better they’ll understand their business, which is helpful when credit tightens. Good bankers will also provide financial advice and connect them to others in the financial community who can help them run their businesses better, which benefits both parties.
As credit tightens, many businesses have found that getting a loan from a bank that is a certified lender from the SBA, is a better option. The most popular loan programs — Section 7(A) and 504 — allow a small business to borrow up to $5 million for working capital, property and equipment and other types of financing. Like most bank loans, you may still have to provide collateral and guarantees, but the chances of receiving the loan are higher. That’s because banks are more amenable to approving these loans because the SBA guarantees up to 85% of the loan amount.
Lewis says that many small businesses — particularly companies owned by people of color — don’t do enough to build up both their business and personal credit history and that hurts them when it comes time to apply for more financing.
He advises starting small with multiple credit cards, home equity and auto loans and then building up a history that shows you make your payments on time.
“A lot of small business owners don’t know that there is a definitive process for establishing a substantial business credit profile and the more credit services that report on your history the more of a chance you have of getting more loans,” he said. “A lender is going to look at a business owner’s credit and determine whether or not they’re going to lend to them based on this information.”
When it comes to getting a loan, banks aren’t the only game in town. There are plenty of alternative lending sources that can also provide financing to a small business owner who needs capital for a specific purpose. A good place to find these loans is Lendio, a marketplace that matches their small business customers which potentially hundreds of private financial services companies that loan money.
“The demand for capital remains strong,” said Brock Blake, Lendio’s CEO and founder. “Unemployment is low and many small businesses are doing well. We still have many lenders that are eager to put their capital to work.”
In addition to Lendio, merchants can take advantage of the cash advances that are provided by some of the major cash payment service such as PayPaland Square. Other businesses are turning to smaller lenders like community banks and credit unions. These options can be more expensive than a traditional bank but just because the cost of borrowing is higher, doesn’t mean it should preclude a business owner from seeking financing.
“It’s all about ROI [return on investment],” said Blake. “If a business owner knows that borrowing a certain amount for a piece of equipment will result in it generating more revenues, then it’s a matter of evaluating whether they can still profit, regardless of the increased lending costs.”
If the numbers work, most experts agree that higher interest rates shouldn’t stop a business from seeking financing.
“We have clients that are poised for growth but are not seeking lending and that’s keeping them small,” said Lewis. “That doesn’t have to be the case.”
