Getting a bank loan for your business is tougher this year — but not impossible

Are high interest rates impacting the ability of small businesses to get a bank loan? Seems so.

The Kansas City Federal Reserve in September reported that small business lending was in decline midway through 2023, and according to the most recent report from financing platform Biz2Credit, lending to small firms from big banks (with assets more than $10 billion) has been on a “downward slope” throughout the past year.

“Acquiring a business loan from a big bank has become increasingly more difficult with each passing month,” wrote Rohit Arora, Biz2Credit’s CEO in Forbes. “Small businesses in need of funding have many options, but capital is not flowing as freely as it did from 2011 until 2020.”

Rob Curley, an executive vice president at TD Bank in Philadelphia says that the quick rise in interest rates this past year had an impact.

“It was a shock to our customers, particularly the ones who had floating rate lines of credit and other short-term debt,” he said. “It really put a strain on their cash flow because it happened so quickly and they didn’t really have the time to adjust.”

Interest rates are expected to remain high in 2024, which means that small businesses looking to get bank loans are going to continue to find the environment challenging — and costly. Even though financing costs are more expensive, if you can show a measurable return on investment for a loan, the capital is available if you go at it the right way. Which means, like always, demonstrating a good financial history, proving that you can afford and maintain the debt payments and also providing assets — even personal guarantees — to collateralize the loans.

None of these requirements are different than before. But there are other factors that have become just as important.

Dan Krewson, a vice president at TruMark Financial Credit Union in Fort Washington, says that it’s important to work with a local banker or financing firm.

“Philadelphia is still very much a neighborhood-by-neighborhood type of city,” he said. “Your lender really needs to understand the intricacies of our submarkets and our neighborhoods. For example, health care is a big industry here, and if you’re a business in that industry looking for a loan there’s potentially more stability and less risk compared to other industries.”

Banks that evaluate prospective customers using only credit scores may not be the best choice for your small business either.

Curley says that having a one-on-one relationship with a person who takes the time to understand the owner’s business can offer more creativity and insight for helping to navigate the economic environment.

“Getting to know the customer and their business allows us to anticipate what their future needs might be and what products and services they might need to help their businesses either save money, save time, or continue to grow,” he said. “You can only get this through a personal relationship.”

Curley admits that certain industries are finding it harder to get financing than others. Technology funding is down significantly, manufacturing has been contracting, and there is a lot of concern about commercial real estate.

Krewson warns that even distributors and wholesalers should be aware that banks are wary of financing these businesses due to “margin compression” from big platforms like Amazon. But these factors can be mitigated by personal interaction.

“If I can drive to a customer’s office and sit down with the owners and have a conversation, I can better understand the people and their strategies, and this helps get loans approved,” he said.

As difficult as the financing environment is for small business it’s still very important to evaluate your potential bank or financing firm. A good banker should have experience in your industry so that they understand what assets are needed for collateral and what metrics are important to watch.

“If I was a business owner I’d also be asking about a bank’s liquidity and whether or not they offer a good portfolio of products and services,” Krewson said. “It’s not just about getting the lowest interest rate.”

Curley agrees.

“It’s important to choose a bank that has liquidity and strong balance sheet management,” he said. “Just like any business, we aren’t immune to the things that happen in the economy.”

Both Krewson and Curley agree that involving advisers — certified public accountants, attorneys, and business consultants — can not only help generate more reliable numbers and better documentation but can add credibility, and that makes the process easier.

“It’s not impossible, but it is harder for us to lend to a customer when all they can provide is financial information that they’ve prepared themselves,” said Curley. “We’re much more comfortable when outside professionals are involved.”

Finally, big banks aren’t the only game in town. According to the Biz2Credit report, small banks’ approval percentages rose from 19.3% in September to 19.5% in October, marking an increase every month since June 2023.

“Small banks have proven to be quite dependable for borrowers in today’s economic climate,” Arora wrote. “They’re more focused on Small Business Administration lending than the larger banks are, and they are closing more loans.”

Krewson says that small businesses should be evaluating all financing opportunities.

“There are credit unions and private lenders,” he said. “Yes, the costs may be higher, but there’s all sorts of money available and a pretty robust local economy. Borrowers may need to do a little bit more research than what they did in the past, but there are options.”