Obtaining Small Business Financing

Small Business Guide

By Anthony Bucci, Assistant Editor On Oct 26, 2015

While the US economy has been improving, interest rates have remained low and the lending environment has remained competitive, which is good news for small businesses. And, small businesses owners have become more confident and optimistic in today’s marketplace, while lenders are seemingly less stringent in making loans, even though it can still be challenging for new and start-up businesses to obtain financing, according to industry experts.

“Even though rates are very good for small businesses today, it can still be a struggle for brand new businesses to obtain financing through traditional means,” says Tom McHale, senior vice president of The 504 Company. “We are hearing from applicants that banks have requirements of being in business for at least two years, or borrowers needing a strong cosigner or collateral in order for banks to consider lending to them. However, if you are an existing small business and are demonstrating positive cash flow, you shouldn’t have a tough time getting bank financing. Part of the key is making sure that you have an established banking relationship, which makes things easier.”

McHale says that due to the Great Recession, entrepreneurs and business owners began to have a negative perception of banks.

“They made the assumption that banks weren’t lending,” he says. “We didn’t see that as the case. Yes, the level of scrutiny banks had against small business may have increased, but banks were still lending during that time. And, they are continuing to lend today, while somewhat easing up on lending criteria.”

The size of the bank can also play a role in determining what businesses banks lend to and whether or not they meet specific lending criteria, according to McHale.

“Larger banks tend to be stricter as to who they lend,” he says. “Smaller community banks are a bit more relationship-orientated and flexible than larger ones. They have more tendencies to work with a customer than a larger bank might. It isn’t true in every case, but that is generally what we see.”

As a community-based lender, Kearny Bank establishes relationships with it clients and learns about their businesses.

“We visit with them every chance we get and listen to their needs,” says William Clement, senior vice president, director of commercial and industrial lending at Kearny Bank. “We learn from them and we try to be as flexible and creative as possible with the financing.”

Clement says that “five to six year ago, the credit market was fairly tight,” but it has “loosened up considerably.”

“It is very competitive out there in the market today and that is very good for small businesses,” he says. “Especially here in New Jersey, there are a lot of banks competing for qualified borrowers. And, it is the small- to mid-sized banks that are very active with small business loans more than the larger banks.”

Clement says that when making loans to small businesses, a few of the things Kearny Bank looks for is the character and commitment of the owner.

“When we ask a potential borrower for a personal guarantee on their business through collateral or other means, and they say, ‘I don’t know if I want to do that,’ that is a red flag to a bank. If they are not committed to standing behind their business, it is hard to get a bank to stand behind it and support it with financing. It’s the individual who comes in and says, ‘I’m putting everything I have into this, I fully support it and I’m going to make this thing work.’ That is paramount to us as a bank.”

“We look at strong, consistent management and, of course, having enough cash flow to service the debt when determining a loan,” says Jo Lederman, senior vice president, small business banking manager at Bank of America. “If a business has a solid foundation and management style, that is something that is essential.”

And, even though Bank of America is a “larger” bank, it takes pride in the relationships it establishes with clients.

“Our small business bankers have been in their roles for many years and are considered, in many cases, part of the management team of a small business,” Lederman says. “We feel very strongly that a relationship is critical to any growth of a business. … We are seeing businesses grow much more in today’s market. That growth is helped by some kind of financial support, whether it is a line of credit, hiring new employees, obtaining new equipment or expanding facilities.”

Bank of America, Kearny Bank and The 504 Company are all Small Business Administration (SBA) preferred lenders. This means they have “demonstrated a proficiency in processing and servicing SBA-guaranteed loans,” including: SBA 504 Loans, which can range from $25,000 to $5.5 million and allows business owners to put down as little as 10 percent, while the lender contributes 50 percent and the SBA puts down the remaining 40 percent; and 7(a) Loans, in which the SBA can guarantee as much as 85 percent on loans of up to $150,000 and 75 percent on loans of more than $150,000, with a $5-million maximum loan amount.

“Entities like the SBA have made it easier for small businesses to get loans,” Kearny Bank’s Clement says. “If we can’t make a loan through traditional means, we will turn to the SBA programs to see if we can help provide a small business with what it needs.”

With all of the different avenues that are available to obtain financing, the biggest advice that Bank of America’s Lederman has for any small business owner is to “do your homework and educate yourself as to what is out there, have a good business plan and surround yourself with good advisors like an accountant, attorney and a lender who will be a part of your business ‘family,’” she says. “That is what will help you obtain the financing you need to grow.”

 

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