Present Barack Obama must have read my column in Monday’s Sarasota Herald-Tribune, a New York Times publication. In it I wrote that two large banks turned down a Bradenton, Fla.-based small business for a loan. After being rejected, the applicant got a SBA-guaranteed loan from a local community bank.
Even if Obama did not read my column, he realizes that community banks are fertile grounds for small-business lending. Fifty-six percent of all small-business loans in 2009 were made by banks with under $1 billion in assets, according to a fact sheet from the Obama Administration. The larger banks made 21 percent.
As a result, Obama wants to make inexpensive loans available to banks with less than $1 billion in assets. To get the money, the lenders will need to present a plan explaining how they will use it to make more loans. Additionally, he will propose to Congress that it increases its statutory lending limits for most SBA lending programs.
Although bolstering community banks’ lending power is a reasonable tactic, it is important to investigate further before you assume that a community bank will make you a loan and big banks will not.
For example, Wells Fargo, with over $500 billion in assets, is the nation’s number one SBA lender and BB&T leads the pack in several states. Its assets top $150 billion. Both of these banks make basic SBA 7(a), Express Loans and also 504 Loans.
Basic 7(a) is the agency’s most popular program, and is often used for working capital, equipment purchases, owner-occupied real estate and business acquisitions. $2 million is currently the maximum loan amount but Obama wants to increase it to $5 million.
Many of the large banks like the Express Loan program because it uses streamlined processing on their own forms. Lenders keep the loan amounts under $50,000 to avoid requiring collateral. To make fast underwriting decisions and close quickly, they rely heavily on credit scoring. But as Bank of America and others have learned that model was flawed, resulting in excessive defaults. It is rethinking its approach to small-business lending, according to several of its loan officers.
The 504 program finances owner-occupied real estate and equipment. These are economic development loans that create or retain jobs as a prerequisite. Obama wants to increase the portion that SBA guarantees so that borrowers can get 90 percent loans for projects that cost up to $12.5 million for most economic development loans and $13.75 million for manufacturing facilities.
Even though some community banks may be getting an infusion of cash to make small business loans, you need a borrowing strategy that includes both small and large banks. That starts with your current bank. It may be willing to reach a bit further to accommodate you by reworking your current debt or making an additional loan. If your bank won’t help you, get a list of the most prolific small-business lenders from your SBA district office.
Importantly, do not make application with banks that are likely to reject you. The reason is that they check your credit report. And when you go to the next lender, it will also pull a credit report and become aware that you been looking for loans elsewhere. The presumption is that they all turned you down and your deal becomes tainted.
A better tact is to ask searching questions before making application.
Start-ups should ask, “Do you finance new companies?” That is because most banks will look for at least two years of tax returns showing increasing profit. Find out if they are lending in your industry. There are banks that will not lend to businesses in the automobile or hospitality industries, for example.
Some lenders require more than 100 percent real estate collateral. “How much and what kind of collateral do you require?” is a good question to ask.
Also ask, “Do you look at my personal credit score and what is your minimum requirement?” That may eliminate more lenders from your list.
Finally, talk about your specific situation, get feedback and respond to the banker’s concerns.
As all good salespersons know, you need a closing question: Try this one: “After all I have shown to you, are you willing to recommend my application to your loan committee?”
If the loan officer “fish-eyes and tap dances,” rather than saying “yes,” go elsewhere.
Jerry Chautin is a volunteer SCORE business counselor, business columnist and SBA’s 2006 national “Journalist of the Year” award winner, tenonline.org/sref/jc1bio.html. He is a former entrepreneur, commercial mortgage banker and business lender.
Follow Jerry Chautin on Twitter: www.twitter.com/JerryChautin
