Small business lending has changed quite a bit in the past decade. Small business lending, like consumer loans, used to be really easy to get your hands on. So much of it was tied to real estate, which kept appreciating in value, which in turn allowed borrowers to qualify for more money. This cycle continued until, as we all know, the real estate bubble popped, and the rest is history. In the aftermath immediately following, the credit markets froze up for a while. Small business lending has not gotten to the levels that it previously had been, but I don’t know if they ever will.
Traditional Small Business Lending a Thing of the Past
It’s certainly more difficult than it used to be to get a small business loan. Banks realize that the underwriting criteria that worked for so long was not sustainable, and have therefore had to make several changes. More than ever, credit has a huge impact on your ability to borrow, regardless of what type of funding you’re looking for. Gone are the days of sub-prime lending. Even merchant cash advance providers, who once boasted that you could get approved regardless of credit, consider credit to be of the utmost importance.
Small business lending has also changed in terms of how long banks like to give you to repay your loan. It used to be common to get a business loan with a term of 5 to 10 years. Now, unless you own a huge business, you’ll be lucky to get a 2 year term.
Small Business Lending Today
Today, most small businesses are qualifying for short term business loans. They’re getting somewhere between 50% and 100% of their average monthly revenue, depending of course on their margins and cash-flow. The other big difference in what people are getting approved for are the payment schedules. Instead of loans with monthly payments, small business lending has moved towards daily or weekly payments.
SBA Small Business Lending
Of course, the Small Business Administration has programs in place with many banks where they offer to guarantee loans that fit certain criteria. Unfortunately, these loans are still originated through the banks themselves. While the SBA can do everything they can to incentivize these banks to lend, the responsibility ultimately lies with the banks. Most small businesses don’t qualify for the minimum loan amount. For bigger businesses, there are still longer term traditional small business loans for business acquisition or real estate related transactions, but they are still very difficult to qualify for. Also, even for these bigger and more established businesses, SBA small business lending just doesn’t seem to exist for working capital purposes.