There is always a lot of media chatter about “main street” and “helping small business”, however, the reality of the situation is anyone seeking loans to small business is going to have an extremely challenging environment to deal with. While the government has moved a tremendous amount of support into the small business lending arena, the reality of the matter is that the government doesn’t make business loans, banks and non-bank lending institutions do. These entities, despite government programs designed to reduce the risk of default, are not lending at nearly the levels they once were.
This begs the question, in 2010, who is making loans for small business?
The SBA– The Small Business Administration has received a mandate to support small business, especially since the new president came into office, the numbers are beginning to show improvement. For fiscal year 2010, the SBA was guaranteeing approx $333mm per week in loans to small business on average, up from a weekly average of $258mm in 2009. This represents an almost 1/3 increase, so things are have improved quite significantly with the increased government assistance. The new bill just passed by Congress ups the guarantee by the government for banks making SBA loans to 90% from 70% against default, thus making it less risky for banks to make loans. This should help increase loan volume even more in 2011 and beyond. What remains to be seen is how big the defaults are now that volume is increasing, or whether the loans are actually incubating viable businesses.
Bottom Line?– Go to an SBA backed program first, before you go anywhere else, provided you have the time. Remember, most SBA loans will take several weeks or months to process, but the rates and terms are by far the often the best available. For amounts under $35K they do have an “express” program designed to get a decision in three business days, but you will still need to give underwriters a written business plan.
Merchant Cash Lenders– These lenders are willing to give working capital to those businesses that process the majority of their revenue with credit cards, but at a steep cost. The upside is that they can work with a variety of credit situations and will normally get the deal done quickly. The downside is that the rates of interest charged can be extremely high, along with upfront application fees and the requirement to switch credit card processors are standard with almost all companies funding cash advances. Because it is not legally regulated as a loan, but an “advance” on future credit card receivables, the rates of interest charged have no legal upward limit. How this works means that a merchant cash company may “purchase” future credit card receipts of $110000 and give the merchant $75000 upfront. The difference between the two figures represents their fee for giving the advance. In this example the rate of interest exceeds 30%, which is not untypical for this type of working capital given by these firms. Obviously, these fees are on top of any upfront fees that may be charged.
Bottom Line– These are the quintessential “lenders of last resort” for those merchants needing money quickly and with relatively low documentation. Because of their ability to handle credit situations of all varieties(within reason), be prepared to pay heavily for the privilege.
Credit Unions- These depository lending institutions are similar to banks, but with none of the “bad karma” associated with today’s financial mess. Simply put, credit unions main purpose is to provide cost effective financial products for their membership, not drive profits for shareholders. Because the members are literally the ‘owners’ of the institution, their interests are always going to be the same. Consequently, credit unions have managed to avoid the risky bets and downright bad lending decisions that drove the current crisis. Credit Unions may or may not make small business loans, but it is a safe bet that many do. The one downside is you need to be a member to join. The good news is that it is estimated that over 95% of America is eligible to join, so make a point of finding one in your area. Joining is usually as simple as opening a checking account for $25.00, and you’ll find the range of lending services available similar to community banks, but usually with less cost.
Bottom Line– This is a great option if you can find an institution that is doing small business loans. The underwriting is going to be more conservative, so don’t go here if you know that you have credit or income issues in the business, it will just frustrate you. However, if you have good credit, the terms for those credit unions offering small business loans should be very attractive and cost effective.
As you can see, there are still options for firms that need loans for small business. What is required is careful consideration and understanding of the needs of your business, as well as you personal tolerance for risk, before making any decision on obtaining a small business loan. The key is to research your options, and discuss them with a professional who can analyze your profile and help you make an informed decision.