Bank Loans Are Becoming Easier To Come By For Small Businesses

July 17, 2014

Starting a new business requires help from a lot of sources. You need excellent employees, the advice of an experienced and licensed Sacramento small business attorney, and investors. Throughout the down economy, that third requirement was sometimes hard to meet for small business people. Fortunately, those times are changing.

The New York Times reports that small businesses are finding bank loans easier to come by. Its report tells the story of Jake Fitzsimmons, the owner of a burger joint. Mr. Fitzsimmons opened his bar and restaurant in 2010, immediately after the recession. Thinking getting a loan would be impossible in the financial climate, Fitzsimmons wound up borrowing the money he could not save from his father. He did the same again when he opened his second restaurant in 2012. But now that he is opening a third location, things are different. He had banks bid on the opportunity to finance his expansion; and it worked. As banks become more eager to lend to the right borrowers, they are willing to compete with one another, resulting in better terms for the borrower than Fitzsimmons could have imagined back in 2010.

Surveys conducted by the Federal Reserve Board show that some banks have been easing credit terms for small businesses over the last two years. Some banks are even limiting their reliance on the borrower's performance over the last three years, realizing that less successful performance during the economic recovery does not indicate that performance will be poor now that the economy is improving.

This is not to say that all small businesses will be able to obtain loans. The Minority Business Development Agency, which is a part of the U.S. Department of Commerce, lists the top reasons why business loans get rejected. It bases its list on research done by Pepperdine University. Those top 10 reasons are:

• Quality of earnings and/or cash flow-29%
• Insufficient collateral-23%
• Debt load-13%
• Size of company-6%
• Customer concentrations-6%
• Insufficient credit-5%
• Size or availability of personal guarantees-4%
• Insufficient operating history-4%
• Economic concerns-4%
• Insufficient management teams-3%
• Weakening industry-2%
• Other-2%

Issues with quality of earnings and/or cash flow is well in the lead as a reason for loan rejections. Quality of cash flow has to do with the cash generated by a company. Is that cash generated mostly by non recurring events like sales of real estate, or is it generated by profitable and sustainable sales of the good or service the company provides? Companies that get most of their cash flow from sustainable profits are more likely to obtain loans.

The second most common reason for loan rejections has to do with insufficient collateral and debt load. Most banks require some form of collateral to give a loan to a small business. If a potential small business owner lacks any form of collateral, it may be nearly impossible to get a loan. In order to make sure you have enough collateral to obtain the financing you will need, you may want to speak with a financial advisor in addition to seeking an attorney's advice as you begin your company.