Getting Credit For Small Businesses

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OCEAN CITY – Despite the critical role that small-business loans play in helping companies survive and grow, they were few and far between in 2009. Last year, U.S. bank lending experienced its steepest drop since World War II, with the volume of loans falling 7.5% from 2008. The reasons for the decrease were numerous. With the recession still rearing its ugly head, not only did fewer borrowers meet banks’ minimum lending guidelines, but fewer were applying for loans in the first place. And small-business loans were no exception.

Many companies were reluctant to borrow for capital expenditures or to hire new employees, given the economic uncertainty. The recovery continues to be slow, and lenders continue to look at prospective borrowers with a more careful eye. But the good news is that we believe the worst is behind us. It is possible to secure a loan in this environment, and some banks are even expanding their small-business lending.

Still, you need to make sure you’ve covered all the crucial details and have a realistic vision of your company’s future. If, like most owners, you’ve been hit hard by the recession, here are a few things you can do to help make your business more attractive to lenders:

Improve your financial reporting. When times are tight, small-business owners may be reluctant to spend on financial reporting. But lenders need to know that your financial reporting is reliable, accurate and current. Banks are looking for comprehensive financial statements that include a profit-and-loss statement and balance sheet.

Explain Plan B. The lender will want to know that if your company hits hard times in the future, you’ll be able to make payments from resources other than cash flow from the business. This secondary source of repayment could include collateral such as equipment or real estate.

Clean up your personal finances. Since you are the face of your business, lenders will look not only at your corporate balance sheet, but also at how you handle your personal accounts.

Show the turnaround. The recession hurt businesses large and small, and lenders understand that. But if you can clearly demonstrate that your company has begun to bounce back, it will help build lenders’ confidence in you as a borrower. Spell out the operational changes you’ve made to cut expenses or to develop higher-margin business and increase revenues and show the numbers.

(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)

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