Why is it that business I speak with so often say, “…We have been with our bank for so many years, but they won’t make us a loan.” Large traditional banks are designed in most cases for retail banking and corporate lending. There is not much money to be made by making small loans at 5% per year to 1000 small customers. Frankly, the larger banks rather lend one large corporate client $100 million at 3% than a 100 smaller loans. So, how does a smaller commercial bank lender make smaller loans when the larger banks cannot? There are clear reasons why smaller lending institutions can lend to smaller businesses more successfully. Here are some of the secrets to why and how businesses qualify for money.
First a small business owner must rate their business in the A, B or C credit categories in order to know what they qualify for and where to look. This the secret to finding a successful bank lending relationship.
A small business in the A credit category would have a company that is profitable, been in business 2 or more years, has a strong equity position on its balance sheet, and a strong principal guarantee with a credit score of +720. This business would be a good candidate for an SBA loan from $100k to $1 million with sales of approximately $1 to $10 million with not too much difficulty at a smaller, more specialized bank. Traditional loans are typically not available to small businesses even at this level without an SBA guarantee to support their loan.
A small business in the B credit category usually lacks one of the above criteria that an A credit has (as listed above). This places the business in the area of receivable financing (aka invoice factoring) or some other form of collateral based lending (i.e. 2nd TD on business property, inventory financing, etc.). These loans are typically with recourse or limited non-recourse and are highly structured. If your customer base is strong and there is payment records to support trends, then this form of lending can very helpful to growing and graduating to the A credit category.
A small business in the C credit category is missing several items from an A credit criteria and often has other items like tax or lien issues that complicate the lending scenario. A seasoned commercial lender can still place creative financing together. The price will obviously be higher due to the higher risk, but if a small business has cleaned up its act and is on a good sales trajectory with descent margins then seeking this type of lending is a great move to maintain stable working capital and cash flow while the business continues to grow so no sales momentum is lost.
“Providing working capital to businesses that have had a few bumps in the road, but are still growing is challenging for traditional banks. Smaller more aggressive lenders are much better suited to actually lend in this area and they can provide a surprising array of products like receivable financing, inventory financing, invoice factoring, trade financing, PO financing, etc.” states, Stephen Perl, CEO of 1st PMF Bancorp.
By Stephen Perl, CEO
1st PMF Bancorp (USA)
1st PMF Capital (HK)
Author of “Dancing with the Dragon: The Secrets of Doing Business with China” (2012)
