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Credit for small businesses – those in the $1 million to $10 million revenue range – continues to be scarce. This is due in large part to tougher lending standards and regulations as a result of the financial crisis. Additionally, some lenders are choosing to take less risks with their money.
According to consulting firm Greenwich Associates, banking satisfaction levels for small businesses across all levels were down in 2010. This was largely due to the difficulty of obtaining credit for such firms, according to the survey. As a result, approximately 25 percent of the small businesses that were surveyed switched banks during 2010, which is more than double the traditional rate of 11 percent.
According to a study by MultiFunding, a Pennsylvania company that matches businesses with lenders, 30 percent of small businesses that sought traditional or Small Business Administration (SBA) backed loans with interest rates below 8 percent would qualify. Almost 50 percent of small businesses would have to seek alternatives, including unsecured credit, which has rates as high as 31 percent. Fifteen percent of such businesses would not qualify for any credit at all.
Creditworthy Companies Have a Buyer’s Market
The outlook is not all bleak. Companies that are deemed creditworthy by banks are in a position to receive favorable rates and terms when they seek credit. Banks are competing for these customers during these tough economic times. So, if your small business happens to be in good financial standing and is deemed to be a good credit risk, you stand to obtain highly competitive rates in today’s market.
Large Companies Obtain Credit More Easily
While it may be of little consolation to small businesses, larger businesses tend to have an easier time borrowing money. This is because larger companies are viewed as more stable than small companies by banks. After all, if you were determining who to lend money to in a weak economy, would you go with Coca Cola or a local restaurant?
Alternative Lending Solutions
There may be some hope, however, for small businesses that continue to have difficulty securing credit. This hope comes from Silicon Valley, and not Wall Street.
In recent years, we have seen growth, and a lot of interest in investing in, alternative lending platforms in the consumer finance space. Already, this interest is starting to show up in business lending.
Whether trying to get funded from Kickstarter, or financing your business with credit card receivables, or new platforms for business loans, traditional small business funding may soon be upended. And these changes may be awesome for your small business.
As always, companies in good financial standing stand to land the most favorable credit terms. Those who are not on solid ground will have difficulty borrowing money. The economic problems in today’s world just magnify the difficulty that struggling companies have in obtaining credit.
Hopefully, alternative lending platforms will become available that provide your small business more options, greater flexibility, and increased probabilities of obtaining the credit you need.
But for now the best bet for any small business is to stay in good financial standing so that when the economy takes a nosedive, your business doesn’t have to.