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It’s a new year and as expected the usual flurry of predictions, reports and prognostications are emerging about the state of the economy, financial trends and what will happen in small business lending for 2017. The noise coming from the pundits may be as accurate as predicting election results, so don’t buy in too soon. Sometimes you need to dig deeper to get the true picture.
As I reported in previous articles, I do not see many of the benefits coming to Main Street small businesses from the broad promises made by the new administration. While tax cuts, deregulation and bringing back jobs to the U.S. are all noble ambitions; unfortunately, most of us will see no noticeable benefit.
For me, the one big misconception fueled by hype, the media and lack of critical thinking, is that decreased regulation will leave banks eagerly dropping billions of dollars at the doorsteps of small businesses seeking to grow. I used to believe in Santa Claus too – but then I grew up and realized it was nothing but a nice story designed to fool kids!
One report cited that the loan approval rates at big banks for “small” to midsized businesses (SMBs) hit an all-time high of 23.7% in November (pretty low if you ask me) and that small (community) banks were up slightly to 48.8% – but approval rates among alternative lenders decreased. Really? A questionable declaration, seeing that all but a couple of non-bank alternative lenders are private companies that don’t report their internal data or financials. The quality alternative lenders I know are growing at 25% to 40% per year. More Facebook style fake news?
What this REALLY says is, the “expert” writing this report doesn’t tell the whole story. He neglected to tell people that under the very broad definition of a small business (variable SBA size standards) that a privately owned company with under 1,500 employees and sales in the tens of millions of dollars can qualify as a “small business.” To most of us that is a BIG business. These companies can have institutional investors, top tier credit ratings, audited financials, annual projections, well-developed business plans and a history of profitability. The loans they are approving are from the top tier. The increase in bank approvals does not reflect the millions of Main Street businesses and restaurants that really drive the economy and whom would be declined in a heartbeat for a loan.
While the report went on to say that banks are gradually increasing their commitment to SMB lending, the reality is very different than the noise. One community bank loan officer recently told me that many small businesses seeking a loan are often counseled to seek outside sources of capital because they fail to qualify for bank loans– even before they apply. So the approval numbers described in the report are actually incorrect.
The author stated that banks continue to invest in technologies that will bring them on par with fintech and alternative lenders as they seek to provide the speed and online experience that became the key differentiator for these non-bank lenders. Well OK – again, it makes for a good story but the reality is that the biggest benefit fintech technology is bringing to banks is giving them a faster way to say, “NO!” They know that underwriting and processing of applications is time consumptive and expensive. Technology makes them more efficient, but it won’t make them say “Yes” more often. They are completely risk averse beings and that will not change. For the average SMB owners that do not have high credit scores, high sales volume, a history of profitability, collateral and willingness to sign a personal guarantee, you will be declined just like you were before.
Another important fact to remember is that regardless of your credit, it is simply not profitable for banks to provide business loans smaller than $250,000. At our company, Strategic Funding, we have financed thousands of restaurants with the majority of them receiving $50,000 or less in funding. We provided funds within days of applying, not months. It’s not that banks are being unreasonable by not doing the same; they simply aren’t built to originate and service these smaller loans in a cost efficient manner.
I regularly talk to small business owners who seek an SBA “loan.” The reality is that the SBA is not providing the loan, a bank is. By guaranteeing a portion of a loan the SBA is inducing the bank to lend to that business as part of an economic development strategy. These loans require good credit, no tax issues and for some programs, real estate or other collateral along with personal guarantees from the owner(s) and their spouses. Their guarantee is that they will come after you and your house, car, bank account etc., if you stumble and fall. Unreasonable? That’s a matter of opinion, but you should be aware that the SBA is not covering you if for some reason you fail to perform and many bankers are not fans of the program.
One banker I recently spoke to said that SBA guarantees fall short in providing real protections for the bank as only a percentage of the loan value is guaranteed and that the bank will only get paid after the SBA exhausts their collection process and gets paid first. It can take years for the bank to get paid from this “guarantee” if they get paid at all. Basically the bank is still at risk and only gets what is left over in a collections action. Not an attractive deal for them.
Small businesses usually need financing in response to an immediate need and can’t wait to go through the protracted approval process that banks or an SBA approval must put them through. Just think about the time it takes for banks to lend against fully secured hard assets such as a home mortgage. A refinance of a mortgage with extremely high loan coverage value will take 60 – 90 days minimum. This is with the bank having a full lien on your property and full recourse to come after you. Do you think they are eager to give out $100,000 with a few hours of underwriting driven by an algorithm with no hard assets to secure the loan?
In addition to using non-bank alternative lenders like Strategic Funding, I would encourage you to look at various economic development opportunities provided by the state and local governments. The New York Business Development (NYBDC) has a number of outstanding programs including the Excelsior Growth Fund, The NYC Food Manufacturers Fund and the Brooklyn Fund. In Connecticut, they offer programs such as Business Express loans and grants which can be part of a comprehensive capital structure for businesses to grow or get up and operating.
In the 35+ years that I have owned and operated small businesses it was never easy to get financing. Today, it is easier than ever. Filter out the noise, the myths, the hype and get real information. Banks are terrific options for top tier borrowers, but they won’t be swimming downstream to the average small business owner anytime soon. Non-bank alternative lenders are still the fastest and most responsive providers of working capital to Main Street businesses. Do your homework to get the best deal from the most reputable providers and you won’t be disappointed. And as I laid out, there are now many more government sponsored possibilities for loans and grants than ever before. Happy New Year!
Questions for Dave? Write to dsederholt@sfscapital.com
