Why Traditional Banks are No Longer Lending to Small Businesses

Why Traditional Banks are No Longer Lending to Small Businesses

Remember the days when you’d need funding to start or grow your business, and you’d get in your car and head down to the bank on the corner?

You knew your banker personally, perhaps even had kids in the same class at school, or would often see them at your favorite local restaurant. This personal relationship helped fuel a strong financial relationship; you knew exactly where to go to get the loan you needed.

But, the days of driving to your local bank for a business loan are long gone. Not only are community banks getting eaten up by the big banks, but bank lending to small businesses is at an abysmal rate. If you’re a small business owner, and you walk into a bank, you’ve got around an 80% chance of getting denied. Yep. That’s right.

Instead of sitting here, drowning in these depressing statistics, let’s take a look at why this drop in small business bank lending is happening.

Why lending to small businesses is declining

When small business lending took a hit during the recession, most thought it was purely a victim of the economic downturn and would eventually inch its way back up.

However, that hasn’t been the case. The total dollar volume of bank loans to SMBs has declined by 20% since the start of the recession. And, it just continues to trend down. Here is why:

  1. Increased regulation. Post-recession, banks have had to tighten up their standards and be extra-cautious about the risk in their portfolios. Remember, they are making these loans with my money, your money, and your neighbor’s money. Hence the reason they have to be so cautious. Unfortunately, small businesses are inherently riskier than their larger counterparts, which makes banks think twice before extending them credit.
  2. Downturn in community banking. Small businesses have historically had more success finding a loan at a community bank than a big bank. In fact, community banks have 3 times the approval rates on small business loans than the big banks. But, our number of community banks have been declining since the 1980’s, inadvertently hurting America’s job creators. With fewer community banks, there is less opportunity for business owners to find a loan at a traditional banking institution.
  3. Less profit on smaller loans. More often than not, small business owners are looking for smaller loan amounts. In fact, our average loan size at Premier Business Lending is $50,000. Other data shows that about 80% of small businesses want loans that are less than $500,000. But, it doesn’t make financial sense for banks to provide these smaller loans. Why? It costs banks just as much to underwrite a $1 million dollar loan as it does a $100,000 loan. Therefore, they can make way more money focusing on larger loans. At the end of the day, banks are businesses too.

When you stop and look at the reasons banks have cut their lending to small businesses, it makes sense. But, it is still frustrating that business owners are having to face so much rejection. That being said, small business owners need to learn to approach their loan search differently. It’s no longer about expecting the banks to give you credit; it’s about being aware of multiple ways to fund your business and preparing to try a few different sources.

But, what are other sources of funding outside the bank?

Meet “alternative” lending. Online lenders have started emerging over the years to help fund borrowers that can’t find capital at the bank, and given the decline in bank lending to small businesses, the alternative lending industry is booming.

Alternative lenders are simply any non-bank lender. These lenders can most often be found online, as they don’t have physical storefronts like the banks. They include well-known companies like Can Capital and Premier Business Lending, as well as hundreds of lesser-known companies. These alternative lenders are offering traditional term loans, invoice financing, short term loans, and more.

So, as you can see, there is hope. As these online lenders mature and their underwriting algorithms get smarter, online lending could very well become the “norm” and end up being able to compete with banks on price.

9 Regulatory Changes That Could Affect Your Business This Year

9 Regulatory Changes That Could Affect Your Business This Year

With another year, comes another set of laws and regulatory issues that businesses need to be aware of.

In 2016, many issues affecting the regulatory landscape revolve around employee pay. Changes to overtime rules and paid sick leave, as well as increased minimum wages are all issues businesses need to stay on top of this year.

Business owners have been inundated with proposed regulations that will affect how they pay employees in 2016.

To help businesses deal with these changes, Premier Business Lending has identified nine regulatory issues that should be on small businesses’ radar in 2016:

1) Overtime regulations: In 2015, the U.S. Department of Labor proposed new salary thresholds for white-collar workers. The proposal would raise the salary threshold from $455 a week to about $970 a week in 2016.

After hearing input from the public on the proposed increases, the agency is expected to release its final ruling this spring. Employers will need to be prepared to take immediate action in order to comply when that ruling is unveiled.

2) Employee pay: Employers throughout the country will be adapting to minimum wage increases, as well as new laws on equal pay and paid sick time in 2016. Specifically, there is a new industry-specific minimum wage increase for fast food workers in New York.

The country’s most stringent equal pay laws went into effect Jan. 1 in California. These new laws require that men and women holding the same positions be paid equally. Also this year, Oregon becomes just the fourth state in the country to require paid sick leave for employees. The new statewide law requires employers with at least 10 workers to provide up to five paid sick days a year.

3) Worker classification: New guidelines from the Department of Labor expand the definition of what an employee is in order to ensure employers aren’t designating some of their workers as independent contractors to save overtime and benefit costs.

Based on these new guidelines, employers should examine their third-party relationships and monitor state and federal agency developments to assist in the efforts to appropriately classify workers.

4) Privacy: Many states have either recently enacted or are considering a wide array of stricter privacy and security laws. These include new minimum levels of encryption and security controls, and stricter notification processes and remediation steps when data breaches do occur.

With this in mind, businesses should be prepared to increase the data-security measures they have in place.

5) W-2 filings: While, previously, employers had until the end of February or March to file their W-2 forms with the state, those dates are being moved up.

In order to close the gap between when employees receive their W-2 forms and when employers need to have those documents filed, 11 states, along with Washington, D.C., and Puerto Rico, now require employers to file both annual reconciliations and W-2 forms by Jan. 31 each year.

6) Retirement plans: By this summer, the Department of Labor is expected to release new regulations that may affect the availability of retirement plan advisors and may result in more scrutiny of a business’ selection and ongoing monitoring of its retirement service providers.

In addition, states may start to mandate that employers not providing 401(k) or similar retirement plans have their employees participate in a state-sponsored plan.

7) Credit card fraud: In October, new credit card security measures went into place that increase the standards for cards equipped with computer chips and the technology needed to authenticate chip-card transactions.

With this change, liability for credit and debit card fraud shifts from issuing banks to merchants who have not yet installed new EMV terminals and processes. The businesses should work with their credit card processors in 2016 to ensure compliance with the rules, so that they aren’t held liable for any fraud.

8) Online sales tax: Recent changes in the congressional leadership could increase the chances of legislation being passed that would allow states to collect sales tax from online businesses, regardless of where the businesses have a physical presence.

Currently, states are limited by federal mandate to collect tax only on online purchases in which the seller has sufficient physical presence in the state.

9) Workers’ compensation: 2016 could see some states weakening requirements related to the insurance costs and processes of workers’ compensation. Facing this possibility, some in Congress have said the federal government may need to step in to maintain worker protections and increase oversight.

How Alternative Lending Has Helped The US Economy And How It Works

How Alternative Lending Has Helped The US Economy And How It Works

According to the Small Business Administration, more than half of Americans own or work for a small business. In fact, small businesses create about two out of every three new jobs in the United States each year, making them an integral part of our economy.

Despite this importance, many small businesses continue to have a hard time securing the funding they need to grow and thrive – at least through traditional banking. If you’re a small business owner, you may have already learned this the hard way.

Why is it so hard for a small business to get a traditional loan? Let’s take the example of a small retail boutique owner who needs a loan but has little to offer in assets to secure it. Say this owner goes to her local bank and applies for a $20,000 loan. The odds are she won’t get a loan approval, but will instead walk away with a credit card application. This is because from a bank’s perspective, that’s about all they can do. Loans of this size simply are not profitable. The cost and considerable manpower required to process them don’t really move the needle for the bank.

In contrast, more agile online lenders such as Premier Business Lending leverage technology to cost-efficiently process hundreds of applications a month. This makes it entirely feasible for us to work with small business owners whose loan needs aren’t as large. In fact, we strive to deliver the best alternative to traditional bank loans by making our terms fair and our application process as easy, fast, and straightforward as possible.

The American economy relies upon small businesses for stability and growth. However, to grow, expand and ultimately succeed, small businesses require consistent and reliable access to capital. According to the U.S. Small Business Administration’s Office of Advocacy, young firms rely heavily on external debt, receiving about three-quarters of their funds from banks via loans, credit cards and lines of credit.

Data provided by the Office of Advocacy reveals that in 2013, over 5.4 million loans were approved for small businesses. Borrowing amounted to about $1 trillion — including $585 billion in outstanding business loans and $422 billion in credit from finance companies, with the rest from a mix of sources. The increased demand for quick and easy access to working capital has sparked fierce competition among lenders to provide alternative lending options that meet the needs of small businesses; however, the type of financing they require will vary depending on the industry and stage of the business.

Here are four principal reasons that small businesses need to borrow money and some alternative lending options available for each:

1. Starting a Business

The average cost to start a business can range anywhere from a few thousand dollars to over $30,000, depending on the nature of your business. It is often difficult to get approved for a loan because most lenders want to see a track record of success and profit.

If you’re starting a business and need start-up capital, first figure out how much you need. Then, look into raising the necessary funds. If securing a bank loan isn’t possible, consider reaching out to your immediate network of family and friends to raise the initial seed money or seek crowd funding agencies.

2. Expansion

Once you have your business off the ground and have established a track record of success, it may still be difficult to obtain a small business loan to finance business-growth operations. Premier Business Lending offers a credible alternative for businesses to get a quick loan.

In order to qualify, you must have at least $100,000 in revenue at the end of your first year in business, and a credit score of at least 500.

3. Purchasing Inventory

Product or retail-oriented businesses often require financing to purchase additional inventory, keep their shelves stocked and maintain profitability and reputation. Due to seasonal shifts in the number of sales and cash flow, businesses may experience a greater demand for a product at certain times of the year. An inventory loan can help bridge that gap.

4. Strengthening the Firm

Revenue-based financing is a great alternative for businesses that are growing and/or have a fluctuating cash flow that requires a more consistent stream of funds to keep the business running strong. There really isn’t a “one size fits all” lending solution for every business.

Chris Wilcox, Managing Partner with Premier Business Lending says “You’re going to want to choose alternative lenders that are focused on improving the experience, when applying for capital. If you’re an early-stage business or a start-up, focus on microlenders that have online loan applications. If you’re a later-stage business, focus on nonbank Alternative lenders that have online loan applications, or community banks/credit unions that have online loan applications.”

A multitude of options are available for small businesses to obtain the capital they need to start up, sustain operations, expand and ultimately succeed. Having a solid understanding of the options available and how they meet your business needs is key to determining the lending option that is not only best for your small business, but will offer a quick turnaround and quality user experience.

What is Alternative Lending?

What is Alternative Lending?

Many of our clients first come to us with little or no knowledge of the alternative lending industry. Most simply have a need for additional capital and have been turned down by traditional “big bank” lenders and are unaware of the many alternative lending options available on the market today.

In fact, big bank lenders approved a record-low 14.8% of small business loan requests in October, 2012. As more business owners and start-up companies become frustrated with traditional lenders and come to Premier Business Lending for answers, we thought now would be a great time to answer a few questions about the steadily growing alternative lending industry.

What Exactly Is Alternative Lending?

Alternative lending is a broad term used to describe the wide range of loan options available to consumers and business owners outside of a traditional bank loan. These alternative options are most commonly used when an individual or business owner cannot obtain a traditional bank loan for any number of reasons.

Alternative lenders specialize in utilizing overlooked sources of collateral such as real estate or even outstanding invoices to secure the loan. They are typically more flexible than banks when it comes to repayment schedules and loan approval and often provide cash much faster than their traditional banking counterparts.

The alternative lending industry is well established and generally staffed by well respected members of the financial services community.

But Aren’t Alternative Loans Too Expensive?

While alternative loans may sometimes have higher interest rates than traditional bank loans, they fill the gap for small businesses everywhere, providing much needed funding for cash-strapped businesses that have been unable to obtain a loan or line of credit from traditional banks.

This gives business owners the opportunity to invest back into the business, manage cash flow and continue to operate for years to come. Any reputable alternative lender will speak with you at length about the best loan program for your business.

What Types of Alternative Loans Are Available?

There are many different types of alternative loans and several methods for collection as well. Premier Business Lending commonly handles hybrid business lines of credit and asset-based lending for our clients, both of which are good sources of fast, liquid capital for business owners.

Other types of alternative loans include medical practice loans which are designed to help grow medical practices, export loans for export businesses, and equity investment loans in which the lender purchases equity in the borrower’s business.

Why the Age of Your Business Matters to Lenders

Why Business Age Matters to Lenders

One of the many factors that a lender considers when evaluating the credit worthiness of a business is their track record. This means the longer the business age, the longer the track record. This can present a huge disadvantage for newer businesses and recent start-ups.

In fact, according to the SBA, as a potential loan applicant, an owner of a new business needs to show evidence that there is a track record of profitability and success in a similar business endeavor.

The business age impacts the business credit profile which a lender uses to make decisions about your business. In other words, the more years of credit history that demonstrate your business can properly use and repay its business loan obligations, the better.

“Thin” Credit Profiles

If you’ve ever been told that your business credit profile is too “thin,” this simply means there’s not enough credit history to accurately evaluate your business. A potential lender tries to predict what your business will do in the future based upon what it has done in the past.

Consequently, if your business has a lengthy track record of borrowing, making regular payments, and repaying debt in a timely manner, your business may be a better risk than a company with a very short history and business age.

This means that if you’ve only been in business for a year or two, you’ll need to take some time to build a strong credit profile. The downside is that there are no real shortcuts to building your profile. Although there are no quick fixes, there are steps you can take.

5 Tips for Building a Solid Credit Profile

Here are some things you can do now to build a profile despite a shorter business age when looking for a small business loan:

  1. Realize it does take time: Be prepared to invest some time. The good news is that 12 to 24 months of effort and positive activity will be make a significance improvement in your credit profile.
  2. >Know your credit profile: Your business profile is made up of your credit history and details about your business. It includes information such as your time in business, your industry, and other similar information. It is critically important to be sure your information is accurate.
  3. Stay current with all your bills: The best way to build a strong profile is to pay all your business bills on time. Having a lengthy business age doesn’t matter if you make many late payments. Too many late payments will quickly hurt your business credit profile.
  4. Don’t rely on personal credit: When starting a business, many entrepreneurs will use the equity in their home or personal credit cards to finance it. However, this does not build your business credit profile. Having a business credit card or credit from vendors and suppliers is a good way to establish business credit.
  5. Be sure your credit history is being reported: If it’s not, you may be building a good credit relationship with card companies and vendors without building a strong credit profile. No matter your business age, no reporting won’t help you.

Also, check to see where your credit history is being reported. For example, many online lenders report to the bureaus while others like merchant cash advance providers typically do not.

Overcoming The Short Business Age Burden

Building a strong business credit profile is one of the most important things you can do to access borrowed capital with a shorter business age. And this can take time.

However, these five tips will help you build a business credit profile that will provide you options when it comes time to apply for a small business loan.