Lending is Up, But Not to Small Businesses

CHICAGO ( TheStreet) -- These days, economic experts are looking for good news wherever they can get it. So a recent report from the Federal Reserve that shows a slight easing in bank lending could be hailed as a sign the year is off to promising start.

Check out the small print, however, and the story isn't quite so rosy -- especially for small businesses.

There are reports of more bank lending, but check out the small print and the story isn't quite so rosy, especially for small businesses.

For one thing, the most recent Senior Loan Officer Opinion Survey makes clear that most banks aren't easing up on commercial lending; the majority are keeping the same stringent standards they've applied since the financial crisis unfolded.

And those that are doing more lending clearly think bigger is better. Almost 20% of large banks surveyed had eased their credit standards for commercial and industrial loans to large and middle-market firms. But only 10% had eased standards for small businesses (those with $50 million or less in annual sales).

David Gass, founder of Business Credit Services, which offers credit building programs and other services to small businesses, says loans can be had -- but only for the top performers.

"Lenders are lowering their risk by lending only to qualified businesses, which makes sense when you see what they went through with the subprime mortgage crisis," he says. "Traditional banks still have very strict guidelines and not many new programs to help the small business startup. However, they do have programs if you have a great FICO score and have been in business for two years or more with financials showing revenue and profits."

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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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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