How to Get Financing For Your Small Business
In today’s hostile economic environment, access to capital is the primary differentiating factor between those businesses which have been able to expand and gain market share versus those that have experienced enormous drops in revenue. The reason many small businesses have seen their sales and cash flow drop dramatically, many to the point of closing their doors, while many large U.S. corporations erhan ufak have managed to increase sales, open new retail operations, and grow earnings per share is that a small business almost always relies exclusively on traditional commercial bank financing, such as SBA loans and unsecured lines of credit, while large publicly traded corporations have access to the public markets, such as the stock market or bond market, for access to capital.
Prior to the onset of the financial crises of 2008 and the ensuing Great Recession, many of the largest U.S. commercial banks were engaging in an easy money policy and openly lending to small businesses, whose owners had good credit scores and some industry experience. Many of these business loans consisted of unsecured commercial lines of credit and installment loans that required no collateral. These loans were almost always exclusively backed by a personal guaranty from the business owner. This is why good personal credit was all that was required to virtually guarantee a business loan approval.
During this period, thousands of small business owners used these business loans and lines of credit to access the capital they needed to fund working capital needs that included payroll expenses, equipment purchases, maintenance, repairs, marketing, tax obligations, and expansion opportunities. Easy access to these capital resources allowed many small businesses to flourish and to manage cash flow needs as they arose. Yet, many business owners grew overly optimistic and many made aggressive growth forecasts and took on increasingly risky bets.
As a result, many ambitious business owners began to expand their business operations and borrowed heavily from small business loans and lines of credit, with the anticipation of being able to pay back these heavy debt loads through future growth and increased profits. As long as banks maintained this ‘easy money’ policy, asset values continued to rise, consumers continued to spend, and business owners continued to expand through the use of increased leverage. But, eventually, this party, would come to an abrupt ending.
When the financial crisis of 2008 began with the sudden collapse of Lehman Brothers, one of the oldest and most renowned banking institutions on Wall Street, a financial panic and contagion spread throughout the credit markets. The ensuing freeze of the credit markets caused the gears of the U.S. financial system to come to a grinding halt. Banks stopped lending overnight and the sudden lack of easy money which had caused asset values, especially home prices, to increase in recent years, now cause those very same asset values to plummet. As asset values imploded, commercial bank balance sheets deteriorated and stock prices collapsed. The days of easy money had ended. The party was officially over.
In the aftermath of the financial crisis, the Great Recession that followed created a vacuum in the capital markets. The very same commercial banks that had freely and easily lent money to small businesses and small business owners, now suffered from a lack of capital on their balance sheets – one that threatened their very own existence. Almost overnight, many commercial banks closed off further access to business lines of credit and called due the outstanding balances on business loans. Small businesses, which relied on the working capital from these business lines of credit, could no longer meet their cash flow needs and debt obligations. Unable to cope with a sudden and dramatic drop in sales and revenue, many small businesses failed.
Since many of these same small businesses were responsible for having created millions of jobs, every time one of these enterprises failed the unemployment rate increased. As the financial crisis deepened, commercial banks went into a tailspin that eventually threatened the collapse of the entire financial system. Although Congress and Federal Reserve Bank led a tax payer funded bailout of the entire banking system, the damage had been done. Hundreds of billions of dollars were injected into the banking system to prop up the balance sheets of what were effectively defunct institutions. Yet, during this process, no provision was ever made that required these banks to loan money out to consumers or private businesses.
Instead of using a portion of these taxpayer funds to support small businesses and avert unnecessary business failures and increased unemployment, commercial banks chose to continue to deny access to capital to thousands of small businesses and small business owners. Even after receiving a historic taxpayer funded bailout, the commercial banks embraced an ‘every man for himself’ attitude and continue to cut off access to business lines of credit and commercial loans, regardless of the credit history or timely payments on such lines and loans. Small business bankruptcies skyrocketed and high unemployment persisted.
During this same period, when small businesses were being choked into non-existence, as a result of the lack of capital which was created by commercial banks, large publicly-traded corporations managed to survive and even grow their businesses. They were mainly able to do so by issuing debt, through the bond markets, or raising equity, by issuing shares through the equity markets. While large public companies were raising hundreds of millions of dollars in fresh capital, thousands of small businesses were being put under by banks that closed off existing commercial lines of credit and refused to issue new small business loans.
Even now, in mid 2012, more than four years since the onset of the financial crisis, the vast majority of small businesses have no means of access to capital. Commercial banks continue to refuse to lend on an unsecured basis to almost all small businesses. To even have a minute chance of being approved for a small business loan or business line of credit, a small business must possess tangible collateral that a bank could easily sell for an amount equal to the value of the business loan or line of credit. Any small business without collateral has virtually no chance at attaining a loan approval, even through the SBA, without significant collateral such as equipment or inventory.
When a small business cannot demonstrate collateral to provide security for the small business loan, the commercial bank will ask for the small business owner to secure the loan with his or her own personal assets or equity, such as equity in a house or cash in a checking, savings, or retirement account, such as a 401k or IRA. This latter situation places the personal assets of the owner at risk in the event of a small business failure. Additionally, virtually all small business loans will require the business owner to have excellent personal credit and FICO scores, as well as require a personal guaranty. Finally, multiple years of financial statements, including tax returns for the business, demonstrated sustained profitability will be required in just about every small business loan application.