Are high interest rates impacting small businesses' ability to obtain bank loans? Sounds like so.
The Kansas City Fed reported in September that lending to small businesses is declining through mid-2023, and a new report from lending platform Biz2Credit shows that lending to small businesses from large banks (with assets of $10 billion or more) is on the decline. The market is said to be on the rise. This past year has been “downhill”.
“Obtaining business loans from major banks is becoming increasingly difficult with each passing month,” Biz2Credit CEO Rohit Arora wrote in Forbes. “Small businesses in need of capital have many options, but capital is not flowing as freely as it did from 2011 to 2020.”
Rob Curley, executive vice president at TD Bank in Philadelphia, said the rapid rise in interest rates over the past year has had an impact.
“It was a shock to our customers, especially those with variable rate credit facilities and other short-term debt,” he said. “It happened so suddenly that we didn’t have any time to adjust, which put a huge strain on our cash flow.”
The basics still apply
Interest rates are expected to remain high in 2024, meaning small and medium-sized businesses seeking bank financing will continue to face a difficult and costly environment. If you can show a measurable return on investment for your loan, even if the cost of funding is higher, if you do it the right way, you can access the funds. That means, as always, proving a good financial history, proving that you can afford to keep up with your debt payments, and providing assets (including a personal guarantee) to secure the loan. .
All of these requirements remain the same. But there are other factors that are becoming just as important.
go local
Dan Krewson, vice president of TrueMark Financial Credit Union in Fort Washington, said it's important to work with local bankers and financial companies.
“Philadelphia is still a neighborhood-to-neighbor type of city,” he says. “Lenders need to really understand the complexities of our submarkets and neighborhoods. For example, if healthcare is a big industry here and companies in that industry are looking for financing, may be more stable and less risky than
look for personal relationships
Banks that only use credit scores to evaluate prospective customers may not be the best choice for small businesses either.
Curley says that having a one-on-one relationship with someone who takes the time to understand your business can give you more creativity and insight to navigate the economic environment. Masu.
“By knowing your customers and their businesses, you can predict their future needs and what products and services your business will need to reduce costs, save time, or continue to grow. ” he said. “This can only be achieved through personal relationships.”
Curley acknowledged that certain industries find it harder to get funding than others. Technology funding is down significantly, manufacturing is shrinking, and commercial real estate is a major concern.
Krewson warned that even distributors and wholesalers should be aware that banks are becoming wary of lending to these businesses due to “margin compression” from major platforms like Amazon. do. However, these factors can be alleviated through personal interaction.
“Being able to drive to a customer's office and sit down and have a conversation with the owner gives you a deeper understanding of the people and their strategy, which helps approve the loan,” he said.
Please check your bank as well.
Although the financing environment is difficult for small businesses, it is still very important to evaluate potential banks and finance companies. A good banker should have experience in the industry to understand what assets need to be collateralized and which metrics are important to focus on.
“If I were a business owner, I would also ask about the bank's liquidity and whether it offers a good portfolio of products and services,” Krewson said. “It’s not just about getting the lowest interest rates.”
Curley agrees.
“It's important to choose a bank with liquidity and strong balance sheet management,” he said. “Like any other business, we are not immune to what happens in the economy.”
Involve advisors and evaluate every opportunity
Krewson and Curley believe that involving advisors such as CPAs, lawyers, and business consultants not only produces more reliable numbers and better documentation, but also increases reliability and streamlines the process. I agree that it will be easier.
“While not impossible, it becomes more difficult to lend to a customer when all they can provide is financial information that they have prepared themselves,” Curley said. “We feel much more at ease when outside experts are involved.”
Finally, it's not just the big banks that are popular in this city. According to a report by Biz2Credit, the approval rate for small banks rose from 19.3% in September to 19.5% in October and has continued to increase every month since June 2023.
“In today's economic climate, small banks have proven to be very reliable for borrowers,” Arora wrote. “They focus more on Small Business Administration loans than the big banks, and they close more loans.”
Krewson says small businesses need to evaluate all financing opportunities.
“There are credit unions and private lenders,” he said. “Yes, costs may be higher, but all kinds of money are available and the local economy is very strong. Borrowers may have to do a little more research than they have in the past, but the options are be.”
