Big Banks Go Small with Small Business Loans
Need a loan for your small business? You’re in luck: small business loans from big banks are on the rise. Small business loan approval rates rose to 19.1% in February from 17.8% at banks with $10 billion or more in assets, according to the Biz2Credit Small Business Lending Index.
There are several reasons for this rise. The economy has been rebounding since 2011, and that means that most small businesses have enjoyed healthier revenues. Since loan officers usually look at a business’s last 3 years of profitability, this means more small businesses qualify for loans. Additionally, the average credit score for small businesses increased in 2013, so there is now a greater pool of qualified potential borrowers.
Additionally, big banks are responding to competition from alternative lenders. When banks lowered their loan approval rate during the economic downturn, credit unions, cash advance companies, and micro lenders filled the void.
These alterative lenders were willing to approve loans to new or struggling businesses that lacked the credit and collateral to qualify for bank loans. But now, with the economy on the rise, big banks are rediscovering the value of small businesses and once again investing in their futures.
Why Bank Loans?
Why are big bank loans a good option for your business? For one, big banks are approving more non-SBA loans in recent months. These loans involve less paperwork than SBA loans and allow borrowers to use the money however they want. Additionally, there are no government maximums on these loans. And when compared to alternative lenders, big banks usually offer significantly lower interest rates.
However, it is still difficult for small businesses to qualify for bank loans. Because banks need to see a record of past income, they usually won’t approve a loan to get a new business off the ground. Even if your business is established, there is no guarantee that you’ll qualify. A recent survey found that only 39% of small businesses seeking bank loans successfully acquired one.
Qualifying for Your Loan
But there are steps you can take to improve your chances for a bank loan. Banks want to make sure that you will be able to repay the loan, so be sure you have the requisite business assets or personal collateral to secure it. And keep in mind that investing your own equity will speak highly of your personal stake in the business’s continued success.
Banks aren’t only investing in your business – they are investing in you. So it is important that you appear organized and well prepared. Know the exact amount of money you need (the average small business bank loan is $135,000, with highest around $250,00), what the proceeds will be used for, and what your specific plan for repayment will be. Additionally you will need to bring a written business plan, a complete statement of current income and expenses, and a record of historical financial data.
You will also need to be on top of both of your credit scores. You probably already track your personal credit score, but what about your business credit score? Banks take both credit scores into account when making lending decisions. You can monitor your business score with Dunn & Bradstreet, Experian, and Equifax. Make sure that every detail on your credit report is correct – even slight errors can disqualify you for a bank loan.
If you’re turned down for your bank loan, ask why. It could be that it was just an easily fixable administrative mistake, such as a missing piece of paperwork. If the problem proves harder to solve, you may want to look into community banks and credit unions, which may be more likely to lend to small businesses.
Consider using personal and business credit cards; asking friends and family for help; or leasing equipment. According to Pepperdine’s 2014 Capital Markets Report, these financing options had an 81% to 94% success rate among business owners.
With the improving economy and rise in bank loan approvals, your small business has more options than ever for external funding. So if you’ve been considering pursuing a small business loan, now may be the time.
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