Where is Small Business Lending Headed?

Charlotte Simmonds

(The following is a guest post from Toby Dahm, Senior Vice President at Hennessey Capital. This article has been re-published here with permission – for additional articles from Hennessey Capital, please visit their Capital Conversations blog.)

Recent economic data suggests that the U.S. economy is beginning to shake off its grogginess and is poised to move forward. A key factor for small businesses to participate in the upturn is having sufficient funding to support their growth. Limited access to capital has perhaps been the greatest hurdle small businesses have faced the past four years.

It appears that finally, the credit freeze is thawing. In a January 4 article by Angus Loten of The Wall Street Journal, he reports that “small-business lending hit a four-year high in November.” What does this mean for small businesses that need to borrow to grow?

Money is out there, however, not all lending institutions are lending. Some national banks and many community banks are still licking their wounds from the recession and are not in a position to expand lending. The willingness of healthy banks to lend is largely based on their preference to balance their loan portfolio which often is heavily weighted with poor performing commercial real estate loans (CRE). This means that banks have a stronger appetite to make general business loans, known as commercial and industrial loans (C&I).

There is money for CRE loans, particularly those supported by the small business administration (SBA), but traditional CRE loan standards have tightened up significantly.

How attractive is the market for C&I loans? As Mr.Loten of The WSJ reported, this market is as good as it has been in four years. However, if you are seeking a C&I loan, you need to carefully select the lenders you apply with. If you want ongoing interaction and responsiveness to changing needs, such as a revolving line, or frequent loan requests to support growth, a community bank is probably a better fit. They tend to maintain a lower loan to staff ratio which allows them to spend more time with individual clients. If you are looking for a low cost, transactional loan such as a term loan, or a lease, a national or large regional bank will be a better fit. Be aware of centralized decision making and limited access to a relationship officer, which makes them better suited for transactional vs. relationship borrowing situations. The larger banks also tend to have a broad offering of non credit services, such as cash management, international trade, investment advisory, etc.

Specialized lending such as asset based lending (ABL) has filled much of the void left as the banks pulled back. This is due to the ABL focus on collateral and cash flow rather than on historical financial results. An asset-based line of credit is often a better fit for small businesses than traditional loans due to flexibility to support rapid growth or unique needs. ABL can also be used in conjunction with bank loans. This type of three party lending arrangement is often overlooked, but can be a great solution for a growing business.

It is encouraging to see our economy gaining traction, and recent data points to a strong start in 2012. Small businesses need appropriate funding to support this growth and I believe that there will continue to be more access to both traditional and specialized forms of lending. It is very important to understand which lending sources are the best fit for your needs and current situation. Being with the right partner will give you your best chance to realize the opportunities that our awakening economy will offer.


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