Need a small-business loan? Beat the big-bank brush-off
By Elaine Pofeldt | Published: August 25, 2015
Tired of getting the cold shoulder from your banker when you need financing -- even though your business is doing well? Maybe it's time you turned to a smaller lender.
Small banks typically have much higher small-business loan approval rates than big banks, according to a monthly index prepared by Biz2Credit, an online matchmaker between borrowers and lenders. In the June 2015 index, small banks approved 49.3 percent of small-business loans, compared to 22.2 percent that big banks OK'd.
Why are small banks so much more welcoming? One reason is they rely less on the computerized algorithms big banks use to vet loan applications, say experts. Often, they leave lending decisions to loan officers who know the communities where they lend.
"They understand local business better," says Biz2Credit CEO Rohit Arora. "They haven't really outsourced or centralized their whole underwriting process in a way where there is no connectivity between the underwriter and borrower. A lot of their loan officers still have a say in how loans are underwritten. It's more relationship driven."
"In bigger banks, it's all driven by a centralized underwriting department," Arora adds. "The loan officers are, much more, paper shufflers."
Robyn Tippins, CEO and co-founder of Mariposa Interactive, a content marketing agency in Claxton, Georgia, turned to The Claxton Bank, a small institution, to get $55,000 in working capital for the business in 2014. The two-year loan, which she used mostly for staffing up, came with an interest rate of about 8.5 percent, she says.
Tippins initially tried the big bank where she had kept her business checking and savings accounts for three years, but was told her firm, founded in 2012, didn't have enough business credit. "They weren't interested in helping us," she says. "It was weird."
In bigger banks, it's all driven by a centralized underwriting department. The loan officers are, much more, paper shufflers.
Then she thought of approaching The Claxton Bank, which happened to be a client. "I'll help you out," a banker told her immediately. Compared to her old bank, she says, "I feel they are more invested in our success. They kind of held our hand through the whole process."
Of course, big banks aren't exactly bit players in small-business lending and some have launched programs to increase their loans to small firms, so it's still worth looking into what they have to offer you. Given their massive reach, big banks do make a large number of loans to entrepreneurs. In the 2015 Mid-Year Economic Report by the National Small Business Association (NSBA), 42 percent of respondents in a survey of small firms said they had relied on a bank loan in the past 12 months for financing. Twenty percent got them from large banks, 18 percent from community banks and 5 percent from credit unions.
Still, the NSBA survey found that 31 percent of owners weren't able to win the financing they need. If you're in that category, including smaller banks in your money hunt may increase your odds of success. Here are some strategies for approaching them successfully.
1. Prepare a strong case for yourself. "In small banks, decisions are made on a branch level," says David Gritz, senior partner at Gen-Y Consultants, a firm in Bethlehem, Pennsylvania, that advises growing companies and has secured more than $1 million business loans for itself and its clients. "They look at more of the holistic picture and the background of the business owner."
Preparing the information a banker will need to form that holistic picture before you meet will help you make the right first impression. A community banker will look at factors such as how many years of experience you have in running the business, whether you have knowledge of the industry from previous work in the same field, what the business's cash flow looks like, your gross revenue for the past two years and whether your growth rate is increasing or decreasing, says Gritz. Your banker will likely also take into account personal financial information, such as your credit score, and ask for a personal financial statement that outlines your assets and liabilities and your cash flow, says Gritz.
During the application process at The Claxton Bank, Tippins found that the president was most interested in her firm's cash flow statement. To inspire confidence, she brought documentation to show that the business -- which serves clients such as Facebook and Mozilla -- had sufficient money coming in from retainer contracts and other sources to pay off the loan. She also provided a statement of accounts -- a record of recent transactions done with customers that includes details of invoices, payments received and other information. "For us, large clients and retainers made us look very stable," says Tippins.
2. Shop around. To find the ideal bank for you, Gritz recommends starting your search by looking at three big banks, three small banks and three credit unions in your community located near your business. While a small bank may end up being your best bet, it's important to know all your options before choosing one. Some banks may offer a special program, such as one for startups, that is particularly beneficial to you, or focus on loans in the size range you need.
"If you treat it like 'I'm just going to stop in one bank and see what happens,' you may get lucky and fall upon the best possible bank -- or get unlucky," Gritz says. "This is a large decision. You're taking a loan for a large amount of money that will materially impact your business. You've got to take it very seriously."
You're taking a loan for a large amount of money that will materially impact your business. You've got to take it very seriously.
Some small banks specialize in lending to businesses in industries they know well, such as delis or gas stations, that big banks often view as too risky, says Arora. Ask other local entrepreneurs in your field if they know which banks lend to businesses in your own field, so you can include them in the mix. "Before you start investing your time, money and effort, you should know if that bank will be comfortable in that particular industry," says Arora.
Take a look at each bank's website to see what options it offers in loans and lines of credit, Gritz suggests. If you don't have collateral to put up, such as real estate or inventory, you will need a bank that offers unsecured options. "If banks don't have [unsecured loans], it generally means they are more conservative on lending," Gritz says. "It will be more difficult to get a loan." What you find out from your online research may help you narrow the list of banks you are considering.
3. Put in some face time. Once you find some banks with potential, set up meetings with whoever handles lending, such as the branch manager or loan officer, Gritz recommends. That will give you a chance to discuss your needs and ask questions, such as how likely the bank would be to lend to you and what interest rates it is offering, that will help you whittle your list further. "Pick the one that made you feel the most comfortable," Gritz recommends.
Tippins was so impressed with how welcome she felt at The Claxton Bank that she moved both her business savings and checking accounts there. "We kind of knew the banker already, from living in a small town," she says. "I'm sure a lot of trust was there for that reason."
The bank hasn't let her down. In need of new office space, she recently got approved for another loan of about $42,000 to buy a building for her 10-employee firm and do some construction on it. The 6,500-square-foot space will cost her about $38,000. "We outgrew the space we were in," she says. That's a challenge she wouldn't be in a position to solve without her small bank behind her.See related: Understanding small-business credit reporting, 7 tips for using online alternative business lenders, 6 steps to protect a very small business from ID theft
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