Small businesses are known to drive the U.S. economy and according to the Small Business Association, make up 99.9% of all U.S. businesses. As Small Business Month comes to a close, it’s more important than ever to recognize the headwinds they face in today’s economic environment, especially when it pertains to new financing.
The National Federation of Independent Business’ (NFIB’s) Small Business Optimism Index decreased by 1.1 points in April to 89.0, to a 10 year low on worries about the near-term economic outlook and rising interest rates. And while the report declined, there were increasing signs that businesses could have difficulty accessing credit.
Rising interest rates, the reduction of the money supply and recent events in the banking industry have banks being even more conservative when dealing with small businesses seeking loans. And while access to capital is certainly possible, businesses today are in a far less forgiving environment—which is why owners need to consider their loan requirements carefully.
There are three questions every business owner needs to ask themselves if they are considering taking out a new line of credit. Is now the right time? What type of loan do I need? How can I demonstrate my ability to service and repay the loan accepted?
Timing:
It’s no secret that it’s harder to obtain that financing today than it was two years ago. With borrowing costs now higher and credit tightening, banks are being more selective in assessing the relationships to entertain. Now is the time that businesses should look to their bank as a trusted advisor to determine whether the timing to take out a new loan is right or if there are other finance options available.
Types of loans/new credit:
Whether it’s a new location, a remodel, a franchise or a new business entirely – there are various types of loans that serve different purposes. When seeking new financing, look for a bank with a diverse portfolio that has a history of lending to a variety of businesses across different industries.
Start-ups and new businesses are often well suited to a Small Business Association (SBA) loan, as they are guaranteed by the SBA and issued by participating lenders, mostly banks. The SBA can guarantee up to 75% of the loan between $150,000 and $5,000,000. This type of loan can be great for new (for-profit) business owners with previous business experience who meet the standard approval requirements.
Franchise businesses are becoming increasingly popular. A recent report by International Franchise Association found that franchise unit and job growth continue to outpace pre-pandemic levels. The report predicts the U.S. will add around 15,000 units in 2023, delivering jobs and business ownership opportunities across the country, despite economic uncertainty across all industries. For this type of business, commercial and regional banks like ours offer tailored solutions that meet the financing needs of local franchise owners.
Beyond new business loans, working capital lines of credit, commercial real estate loans and C&I loans continue to have demand and can support larger, more established businesses. Finding a reputable bank with expertise in this industry can help business owners navigate how the industry is being impacted by economic issues and what loan types are most appropriate.
Approval odds:
When seeking any type of new financing, business owners should ensure that they have the right components so they can increase their chances of securing the loan. First, a business owner should have a business plan, with current financials or projections detailing how their business is profitable or will be soon. Then, they should check their credit score—the owners’ credit is going to be the lender’s first indication of that guarantor or that principal’s propensity to pay debt.
Having a cosigner could be an option for someone that is looking to improve the odds of getting approved for a loan—if that cosigner has something to contribute. How much equity contribution someone has and how much collateral is available to support the loan is another factor.
Small business owners are growing concerned about the ability to access capital. Before borrowing, they should consider the needs for a loan, the shifting trends and behaviors of their clientele and whether they can support repayment.
—
America needs small businesses. They create two-thirds of new jobs and lead the way in innovation. Today’s environment isn’t a reason to shut down an idea or hold back on pursuing a dream. It is time, however, to proceed with caution, assess the level of risk and plan strategically with your bank before seeking out new financing.
Read the full article here