Startups are having a particularly tough time getting financing, especially if the owner has so-so personal credit. An entrepreneur with excellent credit -- say, a FICO score of 735 or above -- may be able to snag a loan, but at a cost. "From my experience, the loan and credit line amounts are much lower than a few years ago and the interest rates higher," Gass says.
Now more than ever, it's crucial to get your financial house in order before shopping around for a loan. Small Business Administration loans remain one of the best sources of small-business financing, so would-be borrowers should spend some quality time on the SBA website learning about different options.
Business owners should also be prepared to show a detailed accounting of how they will use the money if their loan is approved. A well-organized business plan demonstrates that you're clear about the future direction of the business, while a "Use of Proceeds" list provides a step-by-step explanation of how the loan will help accomplish those goals.
Businesses that find their loan applications rejected have often failed to do enough research, Gass says. Every bank offers a different selection of loans, and you need to know exactly what you can get where. "Don't apply at a bank for a $25,000 startup loan even with an excellent FICO if the bank doesn't offer those types of loans," he says. "You'll get declined and have an inquiry on your credit."
Small business may not have many choices, but the loans that do get approved in 2011 will be high quality -- a win-win for the banks and the businesses they help finance. According to the Federal Reserve survey, about 70% of banks expected improvements in their commercial loans to small firms this year (meaning, for instance, fewer chargeoffs and delinquencies).
But overall it looks like loan officers won't be overwhelmed with applications from small businesses this year. About 30% of banks reported increased loan demand from large and midsized companies over the past three months, but only a 5% increase from small firms.
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