With small-business loans elusive, credit cards may be an option

Your Business Credit columnist Elaine Pofeldt
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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Question for the CreditCards.com expert Dear Your Business Credit,
I heard that borrowing from a bank is getting easier for small businesses. I need to borrow about $20,000 for improvements to my retail shop that I've been putting off making. Is now a good time for me to try my local bank? Or should I stick with my credit card? I have been in business three years, and the store is profitable. The store doesn't have any outstanding debts. -- Joe

Answer for the CreditCards.com expert Dear Joe,
Bank loans are usually the cheapest form of small business financing, so generally, that's where you should set your sights if you need financing. There's a wrinkle though: It's still not as easy for many businesses to get a bank loan as before the recession.

Recent findings from Mercator Advisory Group show that the total value of commercial banks' industrial and commercial loans to small business in the first quarter of 2013 was $255.3 billion, down from $302.6 billion in the second quarter of 2008, before lending dove off a cliff in the recession and plateaued at a level that holds steady today.

Banks generally seem to be friendlier to small businesses seeking heftier loans. Research by the U.S. Small Business Administration showed that approvals for business loans of $1 million or more were up 12 percent in 2012 over the year before, while small-business loans under that amount were down 3.1 percent from the year before.

That said, I have come across business owners seeking amounts less than $20,000 who have secured them in recent years, so it's not impossible.

Community banks and credit unions generally have higher small-business loan approval rates than big banks, so if I were in your shoes, that's where I'd start. At big banks, the loan approval rate in November was 17.4 percent, according to the Biz2Credit Index, which tracks loan applications made through the company's online matchmaking platform for businesses and lenders. In comparison, small banks approved 49.7 percent percent of loan applications through Biz2Credit's online matchmaking platform, and credit unions OK'd 44.5 percent.

Of course, each business is different. Stop in and talk to a banker to find out if you would be a good candidate for a loan in the next few months. Find out what the lender's criteria are so you know what benchmarks you need to meet. A bank may want to see that your revenue has reached a certain point or that you have sufficient assets to use as collateral before lending to you. Gathering this information will tell you if it's worthwhile to fill out the paperwork, which takes time.

What if you get discouraging signs from your banker? Then spend 2014 doing all you can to build your revenue and profits -- and address any other concerns you have -- so you're in a stronger position to borrow. I'm hearing from more business owners that their bankers are taking an active interest in cultivating a relationship with them -- something that sadly faded during the recession -- so if your banker is helpful, take advantage of his or her advice.

Using credit card financing during that period to invest in your business may help you achieve those goals and will be an opportunity to add to your credit history, assuming you pay the bill on time and don't max out your credit line. Just make sure to shop around for the best deal. There are many business credit cards, and some are better than others. CreditCards.com has a page where you can compare business card offers by looking at the regular APR, interest rate on balance transfers and fees to use the cards. 

See related: Is my credit score good enough for a business card?, New business financing sources to try when the bank says no, Are there any special financing resources for women entrepreneurs?

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Updated: 03-23-2019