With rates still well below pre-crisis levels, here's what you need to know if you're looking for a big bank loan for your small...
After the financial crisis and ensuing credit crunch, approval rates for small business loans from big banks-banks with more than $10 billion in assets-plummetedto single-digit levels. Over the past year, however, approval rates have been steadily increasing-according to the Biz2Credit Small Business Lending Index, 16.8% of small business loans applications were approved by big banks in April, a 50% increase over this time last year. Although this figure is still low compared with smaller banks, the uptick is a promising sign for small businesses, as household-name banks are a common first place to turn for a loan.
The rising approval rates come with an increasing awareness of the importance of allowing small businesses to access capital. Many big banks have publicly committed themselves to increasing small business lending, and the Small Business Administration last year partnered with 13 major banks to lend $20 billion to small businesses over three years. This is good news for small business owners, but with rates still well below pre-crisis levels, here's what you need to know if you're looking for a big bank loan.
Who Should Apply?
One of the benefits of going to a big bank for a loan is that major banks have streamlined their systems to make it as quick and easy as possible to process loan applications. Many banks are actively investing in new technology to improve their lending system. This means lower fees and faster feedback, but can be a problem for businesses whose strengths aren't of the quantifiable sort.
Big banks will generally feed various numerical data points into a system which will determine if a business qualifies for a loan, which can reject an application without looking at the more subjective aspects of your application, such as your business plan. This means that good credit-both for yourself and your business-is essential, as are promising figures relating to revenue, margins, existing debt, and other quantifiable aspects of your business. If your numbers are weak, it may be best to look to smaller financial institutions who will take greater care in looking at your overall application and considering qualitative factors.
If your business has good numbers, there are benefits of getting a loan from a big bank; since they can often offer lower interest rates and lower fees than smaller institutions.
How to Prepare
A strong business plan is always important when applying for a loan, but with big banks, it's again the numbers that will make or break your application. If you're looking at big banks, your numbers should already be good, but when preparing to apply for a loan, there are things you can do to push them to be even better. After all, with automated systems, even a percentage point can mean the difference between approval and rejection.
The easiest way to boost your credit score is to pay down existing debt. Only time can heal late payment penalties, but since the credit crisis, credit scoring criteria have been revised to place greater emphasis on outstanding debt levels and less on late payments. Paying down credit card debt or other loans can immediately improve your credit score. Do this at least a month in advance of applying so that your reduced debt level has time to be reflected in your score.
Other figures can be manipulated to show your business in the best light. Temporarily reducing inventory levels, collecting on accounts receivables, putting off major equipment purchases or other large, one-time expenditures, and carefully monitoring and minimizing overhead expenses are ways to boost important figures such as your cash-to-assets ratio or liabilities-to-assets ratio.
Don't Forget the SBA
For businesses whose figures are just shy of what big banks require for a direct loan, there's another way to take advantage of their uptick in lending. SBA-backed 7(a) loans are a great way to get the approval you need. With last year's partnership, many big banks, including J.P. Morgan Chase, Wells Fargo, Citibank, and Bank of America, have made SBA-guaranteed small business loans a priority.
Although the process of applying for an SBA-backed loan can be cumbersome-the SBA currently lacks many of the new technological advances big banks have incorporated into their loan application process, including electronic signatures-paperwork reduction and digitizing initiatives are currently underway to simplify the process, so it's not the chore it once was. Further, new proposals will do away with loan origination and servicing fees for 7(a) loans, making the SBA an even better option.