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Funding Denied: Why some small business loan applications fizzle out

February 24, 2011 in Small business funding, lending, small business lending by admin | 2 comments

A Simple but Costly Mistake

When looking for a business loan it is critical to present a professional appearance to potential lenders. Everyone knows to be organized, thorough and courteous, but many make a common mistake that ensures lenders won’t take them seriously. The fix is inexpensive and simple but if you aren’t aware of the problem it can be a costly mistake.

Many business owners underestimate the need for a custom email address for their company. Often, the first piece of information a lender sees about you and your company is an email address. Your first impression should be that you have taken the time to structure your business communications correctly. Sending business correspondence from a free email service like Gmail, Yahoo, or AOL undermines professional image.

Additionally, creating a simple web site to go along with your domain provides an extra edge of credibility. Savvy lenders, partner companies and consumers will check your site. Having a professional site not only shows that you are a legitimate business, but provides more information about your company. Consider it a low-cost opportunity to present your sales pitch to each visitor to your page. Most companies that sell domain names will also provide hosting, and many will set up a simple page for you.

A custom business domain name and email service is easy to set up. Some solutions cost less than $10 a year. Owning your domain shows lenders that you are running an established and legitimate company, and that you plan to stay that way. Take the time to set up a custom domain for your business emails.  Start your conversation with lenders on the right note.

(The following services provide simple, affordable solutions for small to mid-size businesses)

SBA loans: No Green for this Landscape Architecture Firm

August 2, 2010 in Access to capital, SBA 504, SBA lending, SBA loan, Small business funding, lending, small business by schesnutt | No comments

As part of our ongoing series on small business funding, I sat down with Dave Price, whose firm, Bennett Design and Landscape, is a nationally recognized landscape architecture firm and a fixture in the Atlanta landscape design scene.  He shared with me his personal observations and described his experience applying for an SBA loan.

Your story is a classic start-from-scratch American small business story.  Can you share a little bit about how you went from not having a business to a $5 million business with 13 employees a few years later?

My partner and I both had full time jobs.  He was a landscape architect and we thought why not make some money on the side designing and installing small landscape projects for homeowners?  We soon realized that once we earned our customer’s trust on the small jobs it quickly went to, “I need a new driveway or retaining wall.”  Within a year we thought we had enough business for one of us full time and a small office in the basement.  A year and a half later we had an office manager, and a couple of employees and we were both working in the business full time. 

Whenever owners of small or start-up businesses ask around about financing they are often advised to look into an SBA loan.  When you started thinking about getting an SBA loan, how did you research the process and how did you get started? 

Around that time we already had a $60,000 working capital line of credit and an additional $15,000 line of credit secured by our building, plus a HELOC on my home.  We knew nothing about SBA loans.  We already had depository and lending relationships with a couple of Tier 1 banks so we started there.  They explained the process to us, looked at our P&Ls and Balance Sheet and gave us packets outlining the process step-by-step.

With your existing lines of credit, you had already been through the underwriting process before. What was different about applying for an SBA loan?

The level of paperwork involved.   We learned it wasn’t just a lot of paperwork for us; it was a lot of paperwork for the bank too.  We also had a misconception.  We thought, here was the SBA with a pile of government money to help small businesses to grow the economy.  We found out that the banks are really lending their own money and the government was just acting more like the FDIC, as a back up.

The bank was much pickier than for a standard line of credit.  The SBA wanted to know specifically how you were going to use the money and how it was going to impact your business.   In the end, both banks told us this is going to be a mess.  It’s going take a lot of your time and your chances of getting approved for the loan are maybe 30%. We were bankable but weren’t nicely fitting into the criteria.  They explained that we were not a minority or female owned business.  We weren’t doing work for the government. 

To come – Part 2:  That’s not the end of the story though.  You tried again! 

This post is part of a series on funding small and medium sized businesses; first-hand accounts from people who have been through it from knocking down SBA loan hurtles, to how venture capitalists and private equity partners think, to what’s new in getting an old school line of credit. 

Dave Price started his landscaping design and architecture firm in Atlanta with a $100 investment.  Fourteen years and several local and national awards later, Bennett Design & Landscape’s designs have been featured in Southern Living and Atlanta Homes & Lifestyles. 

Sandra Chesnutt is a Marketing Senior Manager with Ftrans.  Ftrans combines outsourced accounts receivable management with fast and affordable access to funding – providing small and medium businesses the cash they need to grow and take advantage of market opportunities.

Small Business Loans – The Collateral Catch-22

July 22, 2010 in Access to capital, Small business funding, credit crisis, credit scoring, lending, receivables, small business, small business lending by JimLesterIV | No comments

For businesses seeking small business loans or working capital loans, the process may seem like a Catch-22, or no-win situation.     Generally, loans are secured by collateral such as accounts receivable, inventory, real estate, and other assets.  But, according to the Wall Street Journal’s article, Collateral Damage in Lending, the collapsing value of assets such as inventory and equipment is causing a collateral gap and resulting in many businesses falling short of loan eligibility.   Thus, these small businesses must still pledge the usual collateral, but, increasingly, small business lenders are requiring cash or other highly liquid assets as secondary sources of repayment.   The Catch-22 is that often these cash requirements are equal to the loan request amount.   As a result, small business owners find themselves asking, rhetorically, “If I have the cash, why do I need the loan?”  

Accounts receivable remain one of the most important assets of a company.  They are the primary generator of cash.  Tighten and reduce your cash conversion cycle by reducing your business’s accounts receivable days outstanding to generate more cash.   To do this, consider your business’s complete revenue cycle from customer acquisition to invoicing to payment receipt.  Is your business following accounts receivable best practices?  What is the propensity to pay and credit worthiness of your customers?   How does the business handle aging receivables?  

Companies such as Ftrans offer complete accounts relievable and credit management solutions that help businesses address cash and revenue cycle concerns.   Implementing these best practices enables accounts receivable funding for your business without a Catch-22.

Go Low With Your Cash Conversion Cycle

July 14, 2010 in Access to capital, Small business funding, credit crisis, lending, receivables, small business by JimLesterIV | No comments

As reported by the Wall Street Journal, small and medium size businesses continue to have limited access to credit.   According to Federal Reserve Chairman, Ben Bernanke,

“The formation and growth of small businesses depends critically on access to credit,” Mr. Bernanke said in the text of his remarks. “Unfortunately, those businesses report that credit conditions remain very difficult.”

Absent credit availability in the form of small business lending, businesses must actively manage their cash conversion cycle, which is the time it takes to convert a business’s cash consuming activities into cash payments.   In other words, businesses must manage to a low cash conversion cycle which means having cash tied up in business operations for as few days as possible.  Clearly, a shallow credit market highlights the importance of managing to a low cash conversion cycle as this may be one of the few ways for businesses to have the liquidity necessary to fund their operations.   

How do you manage your cash conversion cycle?   Focusing on revenues and expenses is important.   However, equally important, and perhaps more complex is developing a better understanding of your business’s working capital situation.   Analyze your accounts receivable and accounts payable outstanding days, including inventory, to understand how movements in each affect your cash conversion cycle.   Good cash cycle conversion management equates to better revenue cycle management which equates to an increase in the health of a company.   For more information on cash cycle conversion, click here.   Additionally, consider solutions from companies such as Ftrans which provide full accounts receivable management solutions.

Will banks start lending to SMB's anytime soon?

June 22, 2010 in Access to capital, Small business funding, credit crisis, economy, lending, recession by schesnutt | No comments

The WSJ reports on this question almost daily now:  When will banks start lending to small businesses again?  Greenwich Associates partnered with Ftrans, surveying a host of community banks, to gain insight into the issue.  Dan Drechsel talks about the results of that study and his perspective on the outlook for bank lending to SMBs over the next 18 months.

[youtube=http://www.youtube.com/watch?v=iwJYZyqC8Oo]

Next up:  Will banks help SMBs recover?  Is there actually a demand from SMBs for financing?

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How to Find and Get Cheap Credit

May 3, 2010 in Uncategorized, credit crisis, credit scoring, lending, receivables, small business by schesnutt | No comments

 

Now that you may not be able to run out and get a HELOC to finance your business, you may be taking a look around:  where to find available, affordable credit.  Nothing like a crisis to make clear the obvious.  The cheapest credit in the world is AP.  So how do you get more of it?

In our business, we look at the credit of buyers and potential buyers for our clients all day long.  These businesses range in size from Exxon to Exton Country Store in Exton, PA, and can share with you what you must do to get approved by your vendors.

1)      Keep your nose clean – i.e., no liens, especially tax liens

2)      Pay your bills consistently

3)      Keep your AP less than your AR – your balance sheet is a snapshot of your business

4)      Your availability of credit – i.e.,  liquidity souces

This critical information is gathered and reported by a small group, primarily Equifax, Experian, D&B, but the information can have giant implications for you.  If you’re a small business it’s critical to know how they work….

Upshot:  Make your financial statements available to convince your vendors to give you credit.  It’s cheap, plentiful and may be your best source of financing right now.

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Survey Says: Credit Conditions Continue to Hurt Operations

April 27, 2010 in Access to capital, credit crisis, economy, lending, recession by JimLesterIV | No comments

There are certainly some very positive findings in the recent National Association for Business Economics (NABE)  survey, and this is welcome news.   The respondents indicated that their economic outlook has improved, profits have increased, and job creation has increased. 

However, this finding is troubling:

Nearly half of those surveyed said credit conditions were hurting their operations, compared with 35 percent in January.

Here’s my question: Why are MORE companies saying business credit conditions are hurting operations than in January while at the same time businesses are saying economic conditions are improving? 

I believe the short answer is that more businesses are in the position where they NEED business credit as the economy recovers (efficiency is at an all time  high– they need to hire; they are getting more orders, etc.).    Unfortunately, as our friends at Greenwich Associates have recently stated, banks are notorious for resuming normalized levels of lending on the back side of a recession.   Ftrans’ research indicates a 12 to 18 month horizon before business lending may normalize.   

Businesses that have survived phase I of the economic downturn and credit crisis now need to get creative to finance growth in an upturn.   Welcome to the Catch 22 of the continuing credit crisis. 

Got Financing? Small Businesses Must Be Creative

April 22, 2010 in Access to capital, credit crisis, lending, small business by JimLesterIV | No comments

In consumer lending, Lending Tree made a name for itself with positioning along the lines of, “When banks compete, you win.”   Thanks to social lending sites such as Prosper and Lending Club, today’s positioning is more like ”When your neighbors compete, you win.”   This is particularly true for  micro and small business borrowers that are traditionally underserved by banks because they fall outside of the bank’s “credit box.”   Read this recent article in Forbes for more insight.    Our experience in the market tells us:

  • Lending and investment options for small businesses continue to be limited
  • Small businesses need to be creative and consider all options to improve their balance sheet, cash on hand, etc.
  • Even businesses that are able to identify interested investors need to have processes in place that provide insight into customer risk, etc.
  • Outside investment is only part of the solution

Community Bank lending = Jobs

April 22, 2010 in Access to capital, credit crisis, economy, lending, small business by schesnutt | No comments

Connecting the dots:  Growing losses in community bank commercial real estate portfolios could jeopardize our overall recovery by stymieing lending to small business.   Community banks account for nearly 50 percent of loans to small businesses.  A recently published report from the Congressional Oversight Panel created to oversee the Treasury‟s $ 700 billion TARP bailout program highlights a serious threat to the economy from the weakening financial fundamentals in the commercial real estate sector. Similar to the recent collapse of the residential market, Elizabeth Warren, chair of the Panel stated “…there‟s been an enormous bubble in commercial real estate, and it has to come down.” 

The panel warned that of the approximately 8,100 U.S. banks, nearly 36% of them are small regional and community banks with problematic exposure to commercial real estate. Problematic in the sense that commercial real estate loans represent at least 300% of total capital or their construction and land loans exceeds 100% of total capital.

The Congressional Oversight Panel also warned that almost 3,000 small banks could be forced to curtail their lending because of growing losses in their commercial real estate portfolios. This reduction in lending can severely jeopardize the economic recovery as these banks account for nearly 50 percent of loans to small businesses.

Edgar Ortiz is President and CEO of Strategic Analytic Solutions, an Atlanta- based management consulting firm that provides Strategic Planning, Predictive Analytics and Credit Risk Management Advisory services to small and midsize businesses.  He can be reached at ortiz@strategicanalyticsolutions.com.

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Looming Commercial Real Estate Crisis Threatens Small Regional & Community Banks

April 14, 2010 in Access to capital, credit crisis, economy, lending, recession, small business by schesnutt | No comments

There is a growing concern that a wave of loan defaults in the commercial real estate sector will hit the economy contributing to the insolvency of hundreds of small regional and community banks curtailing access to credit to the local business community and prolong  the economic recovery.

Although profitable during the building boom days of the last decade, this disproportionately high allocation of capital into commercial real estate, poses a serious threat to the survival of small and regional community banks, as they continue to experience:

  • Growing delinquencies
  • High number of vacancies in strip malls, office buildings, hotels, apartments and shopping centers.
  • Reductions in property values as nearly half of all outstanding commercial loans today are “underwater” with borrowers owing more than the property is worth today. In some areas, property values have lost more than 40 percent since 2007. 

During the 2000 to 2008 period, many small and regional banks leveraged trust-preferred securities, a popular financial instrument to raise investment capital.  Their wide acceptance and popularity helped fuel the booming commercial real estate market and more than 1,500 small community banks issued over $50 billion of trust-preferred securities over this period.

Not to miss the opportunity, Wall Street brokerage firms got into the action and began marketing them as profitable, but low risk investments. The process was straightforward as they:

  • Bought trust-preferred securities from individual banks.
  • Packaged them into ‘pools’ of collaterized-debt obligations (CDOs), and
  • Sold them back investors.

Banks liked them because of their hybrid characteristic of debt and equity. If issued by a bank holding company (BHC), up to 25% of a bank’s Tier 1 capital could originate from funds raised through trust-preferred security offerings in the market.

When the economy went into recession and the commercial real estate market faltered with decreasing property values and growing loan losses, a growing number of small banks, issuers of these securities could no longer meet their financial obligations. In the first half of 2009, 119 issuers of these securities had postponed paying dividends and 25 had defaulted on them.

Holding these securities continues to be problematic for the large number of small banks that bought them, because trust-preferred securities were subordinated to all of the issuing BHC’s other debt. Any losses in the value of these securities reduces their capital ratios and curtails their lending capacity to small businesses, the engine of growth of the economy.

Although viewed as an attractive option for a BHC to bolster its regulatory capital during profitable periods, these securities turned out to be problematic when financial conditions deteriorated causing them to write down the securities to their market value, absorbing huge losses, weakening their capital cushions and lowering their capital ratios.

Small regional and community banks now face one of the most challenging market conditions since the 1980s and may bear the brunt of losses in the commercial real estate sector. As noted by Ed Mierzwinski, of the U.S. Public Interest Research Group, in recapping observations from the Congressional Oversight Panel, this wave of defaults “may be the next flashpoint of the financial crisis.”

Edgar Ortiz is President and CEO of Strategic Analytic Solutions, an Atlanta- based management consulting firm that provides Strategic Planning, Predictive Analytics and Credit Risk Management Advisory services to small and midsize businesses.  He can be reached at ortiz@strategicanalyticsolutions.com.

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