Small-business bank loans become a bit easier to get
They're still tough and time-consuming, so consider startup alternatives
Your Business Credit
Elaine Pofeldt is a journalist whose articles on entrepreneurship and careers have appeared in Fortune, Working Mother, Money and many other publications. She is a former senior editor at Fortune Small Business magazine and an entrepreneur herself, as co-founder of 200kfreelancer.com, a website for independent professionals. She writes "Your Business Credit," a weekly column about small business and credit, for CreditCards.com.
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Dear Your Business Credit,
I am getting my business
plan together for my startup and I
intend to apply for a business loan, but am not
sure of the timing. What's the outlook for small business lending, will it get
better, and how will applying
for a small business loan impact my
personal credit? It's very good now and I
don't want to take a hit on it unnecessarily by applying for business loans. I
know from car-buying and home-buying that when you apply for an auto loan or mortgage,
applications are "bundled" and only create one "hit" on
your credit, even if you make multiple applications. Is the same true of
applications? -- Shelly
Congratulations on getting your business plan
together. With the economy getting a little stronger, it is a good time to
start a business for many entrepreneurs.
The outlook for small business lending has grown
better in recent months. When the
Reserve Board of
banks' senior loan officers in
January 2014, it found that they have generally been easing lending standards
on commercial and industrial loans. One big reason is that they are seeing more
competition for such loans. Domestic banks are also making it easier to get
commercial real estate loans, according to the poll. The survey included loan officers
from 75 domestic banks and 21 U.S. branches
and agencies of foreign banks.
Now here's the rub.
Banks are more inclined to lend to large
and midsize firms than small businesses. Among the loan officers, 84
lending standards for businesses with revenue of $50 million or more
stayed the same in the prior three months, while 14
percent said standards
had eased somewhat.
But for small businesses -- meaning those with annual revenue of less than $50 million -- 93 percent of loan officers said
standards for small businesses had not changed in the previous three months, and only
6 percent said they had eased somewhat. (There's a tiny bit of good news: Only
1 percent said standards had tightened somewhat.)
It's also getting easier to find an attractive deal.
The of credit lines for small firms stayed static at 74 percent of the
banks, but improved somewhat in 26 percent of the
It is smart to protect your personal credit, since you will most likely
be asked to personally guarantee a
small business loan from a
bank. Rohit Arora, CEO of
Biz2Credit, an online
borrowers and lenders based in New York City,
says that normally, each time you make
a loan application with
an individual bank, your credit gets hit. However, when you apply through a
matchmaking site like his, he says, "We do one soft pull and then qualify
the customers, as we have underwriting criteria of all
the lenders already in place." There are a number of online
matchmakers similar to Biz2Credit, so if you opt to use one, ask if they bundle
applications in this way.
Now let's look at your individual business, which is
a startup. Banks
have always been cautious about lending to brand-new
businesses. To avoid rejection of your application, get
"proof of concept" before you apply for a loan. Figure out if
there is some way to market what you plan to sell in the business on a limited
scale, to illustrate that people will buy it -- at
a sufficient pace to cover your overhead.
Doing this tells the banker that you not only have a
viable idea but also have the initiative to execute on it.
It will also tell you if you actually like running the
business, before you borrow money to fund it.
There are many ways to get proof of concept. Let's
say you do want to make and sell your own handbags. If you are getting purchases
from your friends and family, that's a good sign -- but
it doesn't tell you if you have a sustainable business. Try setting up a storefront
on an online crafts marketplace such
as Etsy or selling them at fairs and see how that goes.
The same can be done if you work in professional
services. If you work as a marketing director and want to start your own marketing
looking for freelance
projects you can do from home on evenings or weekends. (Just make sure you're
not violating any agreements you signed with your employer that prohibit
moonlighting.) Keep good records on
how much money you're generating, so you can show them to the banker. Many online
accounting systems make it easy to create a profit and loss statement, which is
something the banker will want to
Also consider other types of financing. Credit card
financing is often ideal for startups, especially if you have good credit and
have access to low interest rates. It is quick and easy, relative to applying
for a bank loan.
And don't overlook
financing the business with your own salary from a day job. Research released
in April 2014 by Gallup
shows that for 54 percent of
microbusiness owners, another job is
the main source of income for the
first year. Running a business doesn't have to be an all-or-nothing
prospect. Often, easing into full-time
business ownership gradually works best -- and it's easier on your bank
See related: With small-business loans elusive, credit cards may be an option
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Published: April 28, 2014