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Commercial Lender Changes Hurt Small Business Financing Options

Most small business owners are likely to be severely impacted by recent commercial lender changes. In almost all cases, the business lending changes are permanent and cannot be avoided if a commercial borrower wants to continue their present banking relationship. One noteworthy exception is illustrated by a few new and more flexible commercial lending sources.

One of the biggest commercial lending changes involves new guidelines for working capital financing. Most banks appear to be quietly eliminating business lines of credit or severely reducing the amount they are willing to finance to a level which is not helpful to an average business. Very few businesses can survive without a reliable source of working capital, so this change promises to receive the highest priority from most small businesses. To replace the disappearing commercial lines of credit, the most practical options for business borrowers include working capital loans and merchant financing from one of the alternative commercial finance sources still active in small business financing programs.

Another business lender change is illustrated by the difficulty of locating investment property financing. An increasing number of banks will make commercial mortgage loans only when the commercial property is considered to be owner-occupied (which means that the commercial borrower occupies a substantial portion of the building). Commercial properties like apartment buildings and shopping centers are often owned by investors that do not occupy the property. For many banks, it appears that they are currently restricting their commercial lending activities to those which qualify for SBA loans (Small Business Administration) which generally exclude investor-owned situations.

A third significant business lending change is demonstrated by revised guidelines for refinancing commercial real estate loans. In almost all cases, commercial lenders have dramatically reduced the loan-to-value percentages that they will lend. In some areas and for specific types of businesses, many banks will no longer lend over half of the appraised value. The difficulty for a commercial borrower refinancing an existing commercial loan reach a crisis level very quickly when this happens. In many cases the original business loan was based on a much higher percentage of business value than the bank is currently willing to provide. When a current appraisal reports a decrease in value since the original loan was made, the lending problem is further compounded. This outcome is especially common in the midst of a distressed economy which leads to decreased business income that in turn often produces a lower commercial property value.

For a fourth commercial lending change example, many small business owners have already discovered an inflated fee structure from most banks for virtually all small business finance programs. Perhaps the bank perspective for some of the commercial financing fee increases is that they need to find a revenue source to replace the diminishing income from small business loans which has resulted from bank decisions to decrease commercial loan activity. Except for unusual and unavoidable circumstances, business borrowers should seek different commercial funding sources when they encounter suddenly increased business financing fees levied by their current bank.

Banks changing their overall guidelines for small business financing produce a final and widespread example of commercial lender changes. Many banks have effectively stopped making any new commercial loans to small businesses regardless of business income or creditworthiness. Unfortunately these banks are not announcing publicly that they have discontinued small business finance activities. This means that while they might accept business loan applications, they do not intend to actually finalize commercial financing in most cases. Whenever it becomes obvious that the bank has no real intentions of making a requested working capital loan or commercial mortgage, this approach has clearly frustrated and enraged business borrowers.

The five commercial lending changes described above are unfortunately the proverbial tip of the iceberg. As they approach business lenders to obtain commercial real estate financing, working capital loans and small business financing, business owners will need to be especially skeptical and diligent.

A Step By Step Guide To Building Credit For A Small Business

For a small business financing can mean the difference between life and death. There are many ways to secure financing for any sort of small business these days. One way, is to obtain a credit card. However, many new business owners are unaware of how to go about applying for a business credit. The owner can establish credit in the name of the business without affecting personal credit or he or she can sign for the business personally and assume all the liability. The purpose of this article is to explain to new business owners how they can obtain a company card offer for the first time.

The first thing any owner should do is establish a checking account under the name of the business. This can be done quite easily at your local bank. If you are a sole proprietor than you will have to provide your bank with your social security information for the account. However, if you are the owner of a a newly formed corporation you will need to obtain a federal tax identification number otherwise known as an EIN. Once you have established your checking account you will need to start making regular deposits and show that you have regular cash flow. This will begin to start establishing some credit for your company. Be careful not to over draw the account as well.

The next step you want to take to establish good credit is to also establish yourself with vendors in your industry. Set up credit accounts with local vendors such as office supply vendors as well as merchants who may provide your company with any raw materials. The bottom line is to start establishing a payment history with other businesses. Some of these merchants will then in turn report to the credit bureaus that will also set a credit precedence for your company. All business credit card providers will look at the three bureaus as well in order to make a determination as whether or not they are going to issue you that new business card.

Once you have established a credit rating than it is going to be time to start looking for a credit card provider who is going to best suit your needs. You will want to go over a variety of offers before you apply for any particular card. Examine features such as the interest rate and other fees associated with that card offer. You will also need to determine if you plan to carry a balance or not. Those who do not plan to carry a a balance will want to look at different rewards offers that are on the market. A small business can save money on a regular basis if the owner chooses the right rewards business card. Look for a reward offer that is going to suit your needs the best. If you plan to travel a lot than a business credit card that has good travel rewards program is probably your best bet.

Once you have chosen the right provider than you can start the application process. Prior to turning in the application, the owner will want to gather some important information. Just as you did with your bank account you will need information such as your social security number is you are sole proprietor or federal tax identification number if you are incorporated in any way. You will also want to get together your past tax returns with the IRS to prove your income. A profit and loss statement verified by a Certified Public Accountant will probably also be necessary. Once you have all this information gathered you can begin the normal application process of filling out requirements such as business address, name of owners, type of business, number of years established, as well as bank account and credit references. This is where building up a good history with local merchants is essential for obtaining a corporate card.

After the paper work has been turned in the issuer will look over your criteria and decide if they will grant you the credit that you are seeking. If your creditworthiness meets up to the issuers expectations than they will grant you credit line. If you are rejected, you will be told so in writing and will be given an opportunity to find out why you were rejected. Those who are rejected can apply in the future once they have improved their credit situation.

Financing Your Small Business

If there were only two reasons for a business to fail they would be poor financing and poor management or planning. You can’t over-emphasize the importance of financing your business. Financing the business is not a one time activity as some might think. It is necessary whenever the need arises such as when expanding, modernizing etc. At this stage you need to understand the importance of exercising extreme caution and plan the utilization of capital. A wrong decision here can haunt your for the life of your business.

Are You Sure You Want To Raise External Funds?

For start-ups, it’s understandable that you need to raise capital through loans. But what about expansions and upgrades? Make sure that external financing is an absolute must before you apply. It is critical that you organize your finances at transitional stages but only after you make sure that you can’t do it yourself, either permanently or for some time. Equally important are the criteria of risk, the cost of not financing and how well it contributes to specific and overall goals of the company.

FINANCING TYPES

Equity Financing: Equity financing involves selling off of your shares (mostly partially) in return for cash and giving away that portion of ownership and rights to profits. Equity financing can be sought from private investors or venture capitalists. This brings about proper capitalization opening access to debt financing. Equity finance doesn’t need to be returned like loans unless your partner wants to withdraw.

Debt Financing: Debt financing is loan financing against some kind of guarantee of repayment. The guarantee can be collateral, a personal guarantee or a promise. Lenders restrict the use of debt finance to inventory, equipment or real estate. You need to properly structure the debt and the rule of thumb for doing so is giving long term debt for fixed asset loans and short term for working capital. The reason is that fixed assets generate cash flow over their lifetimes and have the benefit of lower interest rates as opposed to working capital loans.

Sources of Finance:

You can choose finance sources depending on your circumstances and the amount required.

1. Family and Friends: Small and short-term working capital requirements can be financed quickly through your own resources or through family and friends. The benefit here is the absence of the interest component (mostly.) This method of raising finances is handy even in early stages of business. You should be mindful, though, that disputes over money are the main reason that close relationships turn sour.

2. US Small Business Administration: This is the most prominent source for debt financing. The SBA doesn’t lend money directly but organizes and guarantees loans through various lenders and sources under its umbrella. Local governments, banks, private lenders, etc. disburse loans immediately to businesses approved by the SBA. SBA loans are available for various business purposes and at the lowest interest rates available.

3. Venture capital: Raising venture capital is organizing financing through selling shares whose value equals the finance you require. Essentially this means selling a portion of the ownership and control rights. It is essential that a proper valuation of your business’s worth is made before the deal is done.

Financing a business shouldn’t be hard provided you have established your credentials as a good manager, have collateral/assets, a convincing cash flow statement, genuine need, a proven track record, good credit history and a robust plan. This should not just save your business from collapsing but also allows it to grow and succeed.