In the last few decades, the world of small business finance has changed a lot. Traditional lenders used to be more than willing to work with a small business in need of $60,000. Now, most traditional lenders won’t bother with a business loan under $250,000, or a business that doesn’t have a couple million dollars in annual revenue. This has created a huge challenge for the smallest small businesses to borrow the money they need to grow.
While not the only source of capital, the SBA has recognized the need for these small businesses via small loan amounts. To try to address the issue, the SBA has been encouraging their member lenders to create small loans. The current average size of an SBA loan within the 7(a) program is closer to $400,000 than $40,000. In an effort to make some changes, the SBA started by removing fees on their 7(a) loans under $150,000.
A loan of $50,000 or less is considered by the SBA to be a microloan – an amount that seems to fall into the “sweet spot” for most borrowers. Unfortunately for the small business, banks just do not want to work with this size of a loan. These “micro merchant loans” are simply few and far between.
Stacey Sanchez of CDC Small Business Finance, a San Diego-based non-profit lender that specializes in SBA microloans, shared that “There are a number of reasons a bank might not be able to offer them a loan—it might be because the businesses don’t have enough track record, it could be a less-than-perfect credit profile, or the requested loan amounts could be too small for the bank to cost-effectively help them.”
Unfortunately, the economic pressures resulting from the financial crisis of 2008 hit regional banks and smaller community the same way it hit the bigger financial institutions. This heightened the fact that it costs banks a similar amount to underwrite small loans as larger ones. In light of this, it’s hard to point fingers at banks for picking bigger loans over small ones when the larger are considered to be more profitable.
Thankfully for the small business, alternative lenders – or micro-lenders – work with businesses that banks typically won’t. Startups, restaurants and other small merchants are usually considered “high risk” and are turned away by banks. Micro-lenders, on the other hand, take time to evaluate the borrowers differently than most banks do. For them, a borrower’s ability to repay the loan is just as important, if not more, than their credit situation.
“A good business plan is important, but we’re even more interested in whether or not they have the cash flow to make the loan payments. A strong wage earner in the household is critical. We can’t help a startup founder, for example, who needs the loan to pay himself or herself a personal salary to get things going,” says Sanchez.
Access to capital continues to be the biggest challenge a small business owner and startup faces. Finding the right lender makes things even more complicated. If your business is in need of business funding, consider what an alternative lender – like First American Merchant – can do for you. Finding the right capital from the right lender is key; for both the growth of the business itself, and the growth of our economy as a whole.