Ben Bernanke doesn’t think banks are lending enough money to small businesses.
At a press conference earlier this week, the Federal Reserve Chairman said that loans to small businesses have dropped from $710 billion in the second quarter of 2008 to less than $670 billion in the first quarter of 2010. In response, Bernanke urged banks to start lending to more creditworthy vendors. According to some experts, however, the problem is a bit more complicated than that.
“Banks are getting mixed messages from the government,” George Harrop, Managing Partner of CapitalSource’s Small Business Lending Group, tells MainStreet. “On one hand, you have Bernanke and the Obama administration telling banks to lend and on the other, you have their regulators who come in asking, ‘why are you making more loans when you are troubled already?”
Additionally, government programs, such as the American Recovery and Reinvestment Act, (otherwise known as the stimulus, which backed bank loans with federal funds) have expired and replacement legislation, such as the $30 Billion Small Business Lending Fund, is tied up in Congress. However, all hope is not lost.
“Banks are going to be more frugal, but they do have money to lend to someone,” Bill Bartmann, a small business expert, explains, comparing a small business owner’s pursuit of a bank loan to a beauty contest … or an appearance on popular reality-based TV show The Bachelor where “someone’s going to get the rose.”
But how exactly can you get your bank to put a ring on it?
For starters, chose your venue wisely. Many big banks don’t offer assistance to start-ups and, if they do, their lending practices are fairly stringent. Your best bet is to try a small or local community bank. According to Bartmann, many of these establishments have more money to lend because they didn’t practice lax lending habits prior to the recession, a sentiment that is supported by Frank Sorrentino, Chairman and CEO of North Jersey Community Bank (NJCB).
“We have not pulled away a single customers’ line of credit [following the recession], because the underwriting was done correctly to begin with,” Sorrentino says, adding that the seven branches of NJCB continue to regularly lend to small business owners.
To find a small bank that is in a similar situation in your area, both Bartmann and Harrop suggest contacting the Small Business Association (SBA), an independent agency of the federal government that aids, counsels and assists small business owners. Katie Newingham, Editor-in-Chief of NewbyMom.com, was able to get money for her web venture when the SBA put her in touch with Borrego Springs Bank, a Panama City-based establishment that, at the time, was the only bank in Florida offering loans to start-up companies.
“I wrote a 15-page business and marketing plan, filled out an application and sent it in,” Newingham, who got her loan in May 2010 (she was initially denied by Bank of America because her start-up business was in its first two years), explains. She adds that while she had to jump through many hoops during the application process (mostly vouching for partners she intended to bring on board), ultimately, she was able to get a loan “when everyone said it was impossible.”
Of course, once you track down a prospective lender, you need to go in prepared. All experts agree that the very first thing you should put together is a comprehensive business plan.
“This is where most people fail,” Bartmann says. “The stat goes that 90% of all small businesses will fail, but a recent Harvard study showed that 93% of that 90% never wrote a business plan.”
Harrop explains that most business owners miss the importance of a business plan because they don’t understand what it is exactly they’re asking the bank for.
“People thinking they are asking for a loan, but what they are really looking for is an equity investment in an idea,” he says. Therefore, you need to sell you business to a bank just as you would to a private shareholder, or even more so, since borrowing from a bank is “a partnership investment with the return of a loan.” (Translation: your loan officer isn’t going to get rich quick off of your great idea.)
The SBA can assist business owners in putting together a viable plan. However, primarily, you should explain what the business is, why the business will be successful and how the business will make money. You should also include market research, financial projections that list start-up costs and profit and loss statements that project what the business will look like when it actually takes in revenue.
Beyond that, Harrop explains, what you really need to illustrate is a “good and defensible” reason for why you are looking to start a particular company. For instance, you shouldn’t tell a loan officer than you want to open a cupcake chain because you don’t like being a journalist anymore.
“That’s not going to impress a banker,” Harrop says.
What this really means is that you don’t only have to sell your business venture, you have to sell yourself.
Bartmann suggests that, to do so, you should provide banks with personal documents separate from your business plan. This should include a term sheet that outlines how much money and what interest rate (typical rates range between 8 and 14%) you are looking for, as well as the collateral associated with the loan, personal tax returns and a recent credit report … even if it’s less than stellar.
“Why not show them?” Bartmann says. “The bank is going to find out everything about you anyhow.”
Sorrentino agrees, “A nick in your credit is ok, as long as you can explain it.” He adds that banks are looking for borrowers who are transparent, and, consequently, trustworthy. Because of this, don’t be hesitant to reference your prior history with the establishment (whether you hold a mortgage or simply have a checking account.) “This makes you a little better than a stranger,” Bartmann says. “It is definitely a card you should play.”
Another Ace in the Hole? Present your loan officer with a detailed resume or list of personal accomplishments.
“Any accolade you’ve ever received the bank should know about,” Bartmann says. “Even if you won a zucchini contest at the county fair.”
You’ve got your business up and running. Now what? Check out this MainStreet article on what not to do when marketing your small business.
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