Why Has Bank Lending To Small Businesses Been Declining For The Past 15 Years?

Forget about what the media has been saying. If it feels like bank lending to small businesses has been on a decline over the last few years, it’s because it is really happening. Surprisingly though, this decline extends way beyond the past few years. According to data collected by the FDIC, small loans (those under $1 million) made to small companies have been a decreasing fraction of all bank loans for the past 15 years.

It’s an interesting find considering that the media has been quick to point fingers at the recent recession as the cause behind the sluggish small business lending rates. But if the recession isn’t to blame, then what is?

The answer is probably a few things. Scott Shane, over at Small Business Trends offers three possible reasons:

  1. Many big banks have gotten into the nasty habit of “securitizing” their loans, which basically means they’ve been making gobs of money by bundling loan products into bonds that can then be sold to third parties. Since small business loans tend to be unattractive as securitized products go, the banks have opted to reduce the number of these loans in favor or more securitizing-friendly loans. 
  1. A lot of small business lending happens at smaller, community focused banks. The problem is that over the past several years there’s been an overall consolidation of the banking industry and a lot of smaller banks have either closed down or were merged into bigger banks. With fewer small banks available to lend to small companies, the lending rate naturally went down.
  1. Lastly, the banking industry has become more openly interested in bragging rights and a bloated bottom line then in the customers their supposedly serving. Part of the shift in lending may be due to the fact that banks are simply focusing on their most profitable loans- you’ve got it, those over $1 million. These loans loans tend to be more profitable because they can rake in the revenues faster. 

These reasons definitely seem plausible, but there may be a few more as well:

  • It could be that for a variety of reasons small businesses are just seeking fewer bank loans. There has been a burgeoning of sorts of outsourcing and strategic partnerships over the past few years- both of which can effectively reduce operating costs. Smaller businesses have also been having a harder time trying to make a profit- especially over the last few years as costs in employment and healthcare have skyrocketed. Thus, they may be wary about taking on additional debt.

 

  • Over the past decade, alternative, non-bank financing companies, such as cash advance companies and accounts receivables factors, have stepped into the small business loan space. A fair about of small business lending is now being done by these alternative private lenders as well as credit unions, private banks, leasing companies, and private investors doing debt financing. Typically, these financing options are more flexible and easier to attain than your run of the mill small business bank loan so small businesses may simply be bringing their business elsewhere.
  • Finally, many more businesses may just be unable to meet the banks’ lending requirements and are thus not being accepted for financing. This lack of attractiveness may not just be a result of lower sales or poor credit (though they are probably playing a part). It could also be due in part to a broader shift towards intangible assets rather then tangible ones, as well as businesses sporting more flexible (i.e. less stable and known) setups- a situation that makes it harder to assess the risk of extending financing.

Whatever the case, the trend towards fewer bank loans for small businesses is an undeniable reality, and it’s something to consider if you plan on heading to the bank in search of financing for your small company.

Does Your Small Business Need an Accountant?

As a small business owner, keeping overhead costs to a minimum may be top priority. So, when it comes to accounting issues, it may be tempting to tackle the job on your own rather then spending precious capital on hiring a professional accountant to do the job.

 

But is this really a wise move or could you possibly end up losing more than you gain?

The following are some questions that small business owners should ask themselves to determine if they should hire an accountant:

  • Are you really saving money by doing your own bookkeeping? How much time and resources are being put aside to do the job on your own?
  • Do you need professional help in establishing your accounting systems for quarterly and year-end reports?
  • Will you need to complete year-end paperwork for your business, such as W-2 and 1099 forms?
  • Are you aware of what taxes you are obligated to pay and when they are due?
  • Do you need professional help for company payroll?
  • Do you know what expenses are tax deductible?
  • Do you know how to separate personal expenses and business expenses for tax purposes?
  • Do you understand financial statements?
  • Do you know what health insurance is best for you and your employees?
  • How difficult and time consuming is it for you to remain informed regarding tax law changes?

 

If you decide in the end to take professional accounting help, it does not mean that you should dump all the accounting matters on an accountant and walk away – it always pays to be well informed about your business’ cash flow, tax obligations, and overall financial health. Although accounting functions generally get easier the longer you are in business, take a good look at the questions above and consider whether it is really worth the time and hassle to deal with your own accounting.

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Businesses are Seeking Financing Alternatives

The recent economic crisis in the United States left a pall on small businesses all over the country. During the last couple of years, the usual credit lines and business credit cards which kept businesses afloat have seriously diminished

 

 

Common sense would seem to dictate that small business owners would be seeking more SBA loans these days but surprisingly, the opposite is true. According to a recent report, no less than 91% of small business owners stated that they have never applied for a SBA loan. When asked why this was the case, 54% stated that they did not need one; 13% said that they would rather use personal assets, 13% explained that they had taken a loan from another source, 11% admitted that they are unfamiliar with the programs, and 6% claimed it takes too much time.

This being the case, where are these small business owners getting the financing needed to keep their business going? The answer is they’re turning to financing alternatives. Here is a breakdown of the most popular options among small business owners today:

  • Taking on a partner – One of the most common ways to increase the asset pool is to allow someone to invest in your company by becoming part owner. The investor brings in much needed cash but also acquires an interest in your business. Partners can be either active or “silent,” but they definitely have a say in the operations. Partnership agreements should always be put in writing to avoid unpleasant hassles down the road.
  • Personal asset funding – Some business owners choose to fund their business by tapping into non-savings areas of their personal assets, home mortgages, life insurance policies, certificates of deposit, individual retirement accounts or pension plans. It is advisable to be cautious when mixing your personal assets and your company’s development. However, if funding is performed on the basis of a comprehensive plan for both the business and the personal assets, it can provide much-needed cash. It is important to regard this type of funding as a temporary or intermediate-term remedy rather than a permanent solution.
  • Angel investors – By definition, angel investors are individuals who choose to personally invest in a business for a variety of reasons such as the opportunity to use their years of expertise in a given field, access to tax benefits and to shrewd investment opportunities. Angel investors are not as stringent as the average lender but they want to be sure that your company will turn a profit. Before meeting with your angel, research his background, interests, and past investments. Be sure to do your homework – when you meet bring relevant written material such as business plans and projections, and make sure you are able to supply the right answers to tough questions.
  • Family members – They say that blood is thicker than water, so turning to a relative for financing is a reasonable step. On the whole, your relatives will probably demand fewer assurances and will be more susceptible to your ideas than professional investors. One way you can repay them is through profit sharing. Try to keep things professional; Draw up a formal agreement so that you will have the terms of the loan in writing. Make sure to always regard these family members as business associates rather than “mom” and “dad.”
  • Business Cash Advances – Business cash advances are less of a hassle than a bank loan. Most business loans require collateral, good credit and a long business history, which you may not be able to deliver. In many cases the business cash advance does not require you to be fixed to a repayment schedule. If things are slow, the financer often agrees to accept a smaller payment. Such advances often do not require collateral or a personal guarantee. Nor are you required to deliver require financials or tax returns. So in some cases, this may be the way to go.
  • Equipment Lease Funding – Equipment leasing does not infuse your business with cash. However, it does reduce the amount of cash that you need to keep your business afloat. If you are cash starved it might be wise to consider the option of leasing, rather than buying, equipment. By choosing to lease you gain access to many types of equipment from computers and copy machines to fax machines, trucks, and much more. An added plus is that due to the monthly payment structure, you can treat the payments as tax-deductible business expenses.
  • Accounts receivables– Accounts receivables financing enables a business to use its outstanding invoices as collateral for funding. The business can choose to either finance its customer invoices or factor them. If you follow the financing route, the business can apply for a short-term loan against its outstanding invoices at 65% to 85% of the invoice’s face value. In this arrangement, the financing company does not own the invoice nor is it responsible for collecting the outstanding debt. If you opt for accounts receivables factoring, the lender is responsible for collecting the outstanding debt from customers. In this situation, lenders usually provide financing reaching 70% to 90% of the total value of all outstanding invoices. Once the customer pays up, the lender must return the remaining balance, minus a small processing fee.