Financing a small business may be more difficult in 2012 than it has ever been. Banks report lending standards far beyond levels see in pre-recessionary times, evidence that the market for small business financing is still light years behind consumer financing growth.
The market for small business loans is not entirely underwater, however. Banks report eagerness to make the following loans:
1. Cash conversion loans – Cash conversion loans are the commercial bankers’ favorite. A cash conversion loan holds short-term assets like accounts receivable and credit card receipts as collateral in exchange for an immediate cash loan. As the economy improves, banks are marking up their requirements for loan-to-values. In general, expect to receive a loan equal to 90% of the face value of your accounts receivable at a low interest rate, usually less than 4% per year.
2. Equipment and vehicle loans – Equipment and vehicle loans are flowing in levels not seen in years. Banks report that they are willing to finance new equipment and vehicle purchases at 80% of loan to value. Thus, to purchase a new car for your business, expect to put up $4,000 on a $20,000 car to obtain financing on the remaining $16,000. Equipment and vehicle loans are very low interest in this environment, as used equipment and vehicles are holding their value better than ever before. In general, the best lenders are not on-site. Car dealerships and equipment venders are unlikely to finance major purchases. Seek a commercial lender, who will be more likely to carry high balances from a small business.
3. Refinancing loans – Old loans written years ago carry higher interest than loans issued today. Refinancing loans are high on the list for bankers who note that a refinance at a lower late immediately improves a business’s cash flow and profitability. Also, banks carrying aged debt show their ability to repay. Bankers much prefer to lend to businesses that have a history of carrying financing and making routine monthly payments to service their debt.
4. Personal guaranteed lines of credit – If your business needs a small line of credit to streamline operations, consider a personally guaranteed line of credit. Tied into your personal financials, banks report easing credit standards for people who agree to personally guarantee the debt of their business. Loans with personal guarantees are the easiest to pass through risk committees, who see any guaranteed loan to be on an equal footing with less competitive personal loans.
5. Credit cards – Banks use their business credit cards as a way to make loans to businesses without a lengthy credit application process. For amounts of less than $50,000, consider a short-term solution like a business credit card, which is easier to obtain than a traditional small business loan.
Banks are finally easing up to small businesses that would like to borrow to expand. This year, Bank of America announced the addition of 1,000 bankers nationwide to service small businesses. M&T Bank recently quadrupled the size of its small business lending by assets to nearly $200 million. For small businesses willing to shop around, bank credit is finally making a comeback.