Economic Perspectives with Hopeton Hay on KAZI 88.7 FM in Austin, TX

Business Financing During Tight Credit Times

November 13, 2008

By Hopeton Hay

The recent upheavals in the banking system of the U.S. have made it much more difficult for small businesses, especially those without pristine personal and business credit and strong financial statements to obtain loans and lines of credit. News reports indicate a number of small business owners are having their lines of credit withdrawn or bank loans called by their financial institutions. But even with all the challenges, there are still sources of capital available and strategies entrepreneurs can employ to improve access to capital.

Tight Credit Times

According to the Federal Reserve System’s national summary of the October 2008 Senior Loan Officer Opinion Survey on Bank Lending Practices, 75 percent of respondents from domestic banks “indicated that they had tightened their lending standards on” commercial and industrial loans to small firms since July 2008. The survey also indicated that “85 percent of domestic banks reported that they had tightened their lending standards on commercial real estate loans over the past three months.”

Even the U.S. Small Business Administration (SBA), which in the past has had an increase in the number of loan guarantees approved during hard economic times according to a report by the U.S. Senate Committee on Small Business, has seen a historic decline in it guaranteed loans. The SBA’s Acting Administrator Sandy Baruah announced in October that the SBA approved 30,000 fewer government guaranteed loans through the SBA’s 7(a) program, declining from 99,604 in fiscal year 2007 to 69,434 in fiscal year 2008, the largest decline in one year in the history of the program. In response to the decline Baruah said in a press statement that “the SBA is holding meetings across the country to better understand how the agency can work with both lenders and small businesses to help them during these difficult times,”

Strategies to Improve Access to Capital

But with all the upheaval there are some things entrepreneurs can do to improve their access to capital

  1. Identify alternatives to bank financing in Austin -While the news is bad on the banking front, community development financial institutions such as AccionTexas, BiGAustin, and PeopleFund provide financing to small businesses that don’t meet traditional bank underwriting guideliness. In addition factoring companies such as Working Capital Solutions can provide accounts receivable financing.
  2. Cut business expenses – look to see what expenses you can cut and reductions you can obtain by negotiating with current suppliers of the products or services you purchase
  3. Reduce personal debt to improve credit score- as small business owners your personal credit is your business credit, so the stronger your personal credit, the more attractive you are to lenders
  4. Reduce personal cost of living – many lenders when evaluating your ability to repay the loan look at the availability of cash flow from the business and from the household. Reduced household expenses means more cash flow available to make loan payments
  5. Improve the quality and reliability of your financial statements – Lenders need to have confidence that the business financial statements you provide them accurately reflect the condition and performance of your business and that you have a good understanding of them. It is these statements that provide the “proof” that your business has the financial structure and historical performance to meet key components of their underwriting guidelines. Knowing that the owners of the business understand the financial side of the business increases the lenders confidence in your ability to make good financial decisions. Also, having your financial statements prepared by a certified public accountant may increase the confidence the lenders have in the reliability of the financial statements.

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