Not All Small Business Lenders Are the Same
(Bloomberg Businessweek) -- Keeping cash flowing has become increasingly difficult for many of America’s 30 million small businesses since the pandemic upended life. Just over half expect to be out of business within six months, according to a survey conducted in April, Bloomberg News reports. Many businesses are trying to conserve cash (we offer a few strategies in “Planning for Survival: Holding On to the Cash You Have”). Many businesses won’t make it unless they bring in more capital now.
That’s where the Small Business Administration, banks, and other lenders are supposed to help. To use the troubled Paycheck Protection Program (PPP), for example, you need to apply through a participating lender. Having a relationship with a lender is important for many other reasons, but too many of America’s smallest businesses don’t have one, or their existing lender isn’t giving them the time of day. “Traditional lenders can provide significant amounts of capital to small businesses that qualify for it,” says Luz Urrutia, who was a banker for about 20 years before becoming the chief executive officer of Opportunity Fund, a microfinance nonprofit. “And they have a wide array of other services to help businesses grow.”
Urrutia, along with a handful of others—Randell Leach, interim CEO of Beneficial State Bank; Stacy Mitchell, co-director of the Institute for Local Self-Reliance (ILSR); and Charisse Conanan Johnson, a managing partner at advisory firm Next Street—have this advice for finding the right lender and building a relationship that will help your business.
1. If at first you don’t succeed, find a different bank and keep trying.
Many business owners don’t realize that local banks and big banks are “fundamentally different kinds of institutions,” says Mitchell. “There’s a decent chance they’re going to have a different experience at a community bank.” What happens too often is a business gets turned down by one big bank, assumes it’s not viable for a loan, and doesn’t go elsewhere.
An ILSR report released in late April found significantly more PPP loans reached small businesses in states where small, local banks comprise a greater share of the market, compared with states where big banks are more dominant. “Dealing with a bank that fundamentally cares about the success of your business is likely to lead to a much more useful banking relationship,” Mitchell says. “Their interests are aligned.”
2. Come up with a list of what you need, in order of priority.
There are a variety of lenders to research, including traditional banks large and small, online lenders, credit unions, minority depository institutions, and community development financial institutions (CDFIs). To start, determine what matters most to you, says Leach of Beneficial State Bank, which makes business loans of roughly $350,000 to $1 million on average. Efficient deposit services and online bill pay? A banker who you see around town who understands your business? A credit line? Help getting a PPP loan? Help tapping other SBA programs? Accion, a nonprofit lending network, offers a comprehensive tip sheet on evaluating a lender. The SBA also has advice on what to consider.
Leach encourages borrowers to understand their would-be lender’s values and get to know more than just one loan officer. “If there’s turnover within the institution, you certainly want to be able to have the ability to have someone who can advocate for your business,” he says.
Another question to ask: Has your lender handled a brutal economic cycle before? How did it treat its borrowers? “You see people for who they are in a crisis,” says Leach.
3. Avoid predatory loans.
Even if you’re desperate for cash, be wary of merchant cash advances and high-cost lenders. Once you take the money, you’re often stuck in a spiral of debt and subject to aggressive collection practices. “Today and for the past 10 years we have seen how these lenders wreak havoc in small businesses,” says Urrutia. An Opportunity Fund report from 2016 indicated the average annual percentage rate from predatory lenders was 94 percent, she says. “Minorities were getting the worst terms.”
Borrowers should familiarize themselves with the Responsible Business Lending Coalition and its Small Business Borrowers’ Bill of Rights. You can use it to evaluate fees and interest rates, fair collection practices, and credit reporting practices.
4. Beware of online lenders—some are not legit.
As with most industries, there are good and bad players. There are a number of fintechs that Urrutia describes as “very responsible”—ones “that have signed on to the borrowers’ bill of rights,” she says. “They have great products and are really very fast at getting information using alternative data and technology to approve credit for small businesses.”
5. Persevere—don’t let rejected loan applications discourage you.
Historically, the traditional lending system hasn’t been geared toward small lifestyle businesses that aren’t poised for growth or scale, says Charisse Conanan Johnson of Next Street, an advisory firm with offices in Chicago and New York that helps government agencies and financial institutions, among others, get capital, customers, and services to underserved small businesses and entrepreneurs.
Rather than blame yourself for getting turned down for a loan, small-business owners “should be aware of the systemic forces at hand that might be barriers to accessing credit.” On a practical level, improve your financial acumen (Next Street offers trainings) and research all your options.
Traditional banks have to follow stringent guidelines, so they might not serve you for a variety of reasons: You commingle your personal and business finances, you don’t have your records in order, you don’t have a credit score. Invite them to visit your business, show them how it works so that they understand how you make money and that you’re not mixing your business finances with your personal finances.
6. Plan for tightening credit.
Even before Covid-19, access to capital was a significant problem, says Urrutia. “Under normal circumstances, roughly 8,000 small-business loan applications were declined every day in America,” she says. Now, it’s even harder.
One question everyone is grappling with now: What will the lending landscape look like once the worst of this crisis is over? The risk, says Urrutia, is more banks are going to avoid small businesses. Also, financial tech firms are facing challenges with their capital structures—they may avoid small businesses, too. “The gap is going to become even wider in small businesses’ ability to access capital after Covid,” she says, “because of the transformation of the credit landscape.”
In the coming months, the severity of the crisis will become clearer, which will inform whether more lenders tighten their spigots, says Leach. Business owners that see their business rebounding soon should be trying to line up loans now. “If you’re on the fence about taking a loan, there’s no substitute for having cash in hand,” he says. “When you need it most, it’s hardest to get.”
©2020 Bloomberg L.P.