Tuesday, 1 January 2013

Financing Your Small Business In 2013

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Instead of trying to come up with some kind of witty repartee about the state of small business financing in both 2012 and 2013 ? let?s just get down to business.

Looking Back On 2012

2012 was a hard year for small businesses needing financing. Banks were just not lending to these company (those that needed small financing - usually around $100,000 or less). In fact, very few big banks funded any small business loan request at all - regardless of the amount being sought.

Small banks and some smaller regional financial institutions did the bulk of small business lending. But, due to regulatory restraints as well as capital limitations, these organizations just did not make much of a dent in the demand for business capital.

The one bright spot was the SBA. For the federal government?s fiscal year in 2012, the SBA guaranteed some $30.25 billion in small business loans. Down just slightly from last year (2011) ? but still a great amount of lending. That $30.25 billion went to some 44,000 small businesses, with the bulk or the loans that provided the greatest impact, from the organization?s 504 loan program where the business puts up 10%, the bank 40% and the company?s local CDC the remaining 50% - all guaranteed by the SBA.

Other Developments From 2012

Alternative business loans faired very well throughout the year. Business Cash Advances remain the stronghold for retail businesses seeking working capital while Purchase Order Financing and Accounts Receivable Factor were the main stay for distribution and manufacturing companies.

However, there were several new types of alternative loans that cropped up throughout the year. Most of these loan products are plays on the business cash advance product but are not tied to just a business?s credit and debit card receipts but focus on the revenue and cash flow of the entire business with repayment being based on micro payments (daily or weekly) set at a percentage of revenue earned as opposed to the fixed, set monthly payment of traditional business loans.

What To Expect In 2013

Personally, I think 2013 will be just a continuation of 2012. Small businesses will do better at small banks ? local or regional banks. But, they will still have to demonstrate a health method of repayment ? meaning strong positive cash flow and lots of collateral.

The SBA will still remain a big player in small business lending for the year ? but, with many of its most popular programs ending or already ended (like 90% LTV and reduced or no SBA fees) their impact will not match the last two year?s. However, the SBA will still remain a key player in small business financing in 2013 and should always be looked at when beginning your business?s capital search.

In particular, if your existing, growing company is seeking capital to purchase new or replace old equipment or are looking to purchase its own property or take on needed property improvements, then the SBA?s 504 loan is designed just for you.

But, to restate the most important aspect of all small business lending ? those companies seeking financing in 2013, 2014 or beyond must have strong cash flow and more collateral value then the loan is worth ? this is something that will not change anytime in the near future - even if the economy really takes off again. Thus, if your business does not have either of these, then, this is your time to reposition your business (focus on high margin products and services, reduce costs even more or change your overall operations) to be able to show a lender that your business is worth the risk. It is not about trying to get a lender to see the good in your company through all the bad but for you to better position your business to meet the lenders requirements. Lenders will not come to you or change their policies for your business ? you must change to meet their policies.

For those businesses that do not qualify for standard traditional bank loan or for those that want to stay away from banks ? there will still be a robust financing market for alternative loans ? especially those that have strong, growing customers bases and need working capital to support that growth.

For companies seeking much smaller loans ? those business loans that are considered micro loans ? and cannot get any traction from banks or alternative lenders must again fall back on those business loan hybrids like peer-to-peer loans or taking personal loans and using those proceeds to grow the business. It still means putting personal asset at risk and demonstrating some type of personal income but it might be better then the alternative of shutting down altogether ? which many small firms will be forced to do.

Crowdfunding. 2013 was supposed to be the year of the crowd in regards to small business financing. In fact, it was suppose to open nearly all businesses to some form of private equity (venture capital or angel capital) without the limitations of those small business financing vehicles. The actual rules for crowdfunding small businesses in return for small equity stakes were to be completed by year-end. However, do to internal strife in both our national government and the SEC (the ruling body), it does not look good for crowdfunding any time soon. In fact, some are stating that it might be another year ? at the latest ? before small businesses can offer equity in their company to small investors.

The Down Side

There are some reputable organizations like the Economic Cycle Research Institute that claim that the U.S. ? not to mention the world ? has been in another recession since July of 2012 - based on several economic indicators that show contraction in the economy. Further, our capital markets ? particularly the nation?s stock markets have been in a 4 year bull market. Typically, a bull or bear market will only last 4 years. Thus, with backing from recent poor corporate earnings and other similar negative indicators, it would appear that 2013 will see the beginnings of a bear stock market. Lastly, inflation. While some can manipulate inflation numbers to show little price growth ? those that actually go out and consume products day in and day out will clearly tell you that inflation is here, has been here for some time and is only looking to get worse in the coming year (just look at gas and groceries).

All of these factors will hurt small business owners in several ways:

  • First, a recession or just the thought of one will bring less consumer confidence. Thus, they will begin to spend less. And, if the stock markets begin to slide backwards, they will actually have less to spend. Add in inflation and many consumers will no longer have any disposable income as they will struggle just to meet their basic needs.

  • Second, if any of these become prominent ? not to mention all three ? but just one having a big impact ? banks of all sizes will begin to pull back on their small business lending to remove what they would deem as unnecessary risk off their books. This means that whatever gains we have made over the last few years ? like looser credit standards or better loan terms ? will disappear. Lending policies will re-tighten, interest rates will rise and overall underwriting will decline.

  • Third, for those small businesses that might qualify right now for a business loan might not in a month or two. Tighter loan standards and less revenue is a two edge sword that will cut deep into all small businesses ability to access capital in 2013.

Lastly, regarding the fiscal cliff debacle. At the time of this writing, there has been no deal struck and it is unlikely to be a deal by year-end. But, the fiscal cliff impact on small businesses ? overall ? will be negligible. While taxes may go up on some consumers ? those with the means to pay more ? that increased revenue into our government?s coffers will trickle back into the economy (just hopefully the American economy).

Thus, while some individual small businesses will suffer or feel the impact, others will benefit from increase government spending. But, overall the negatives should be washed away by the positives in equal measures.

If your business is one of those that will be negatively impacted ? i.e. your middle class customer base has less to spend ? this might be a good time to switch industries and look toward providing products and services the government wants or needs ? after all, the government is the one with the money. Even if you are not willing to change right now ? keep your eyes opens to what might happen in the very near future ? it is never too late to adapt and change. In fact, that is what being successful in business is all about.

Conclusion

2013 should really look no different than 2012 for small businesses seeking business capital. Big banks are focused on big businesses and big loans with little to no risk. Small banks (local or regional banks) are trying to do what they can to fill these lending gaps and are using the SBA?s guarantees to help both them and your small business out.

For those that have no where else to turn, there remains the standard go to options for small businesses needing small loans for working capital, inventory or operational improvements ? these alternative loans are actually changing by the day to better service the needs of their small business customers.

But, if you are looking for easy business capital in 2013 ? it is unlikely to happen. Strong cash flow and high value collateral will be the back bone of all winning deals. If you don?t have these two key items ? then you have to work hard to get them. In the mean time, continue to cut where you can and always keep your eyes open for new opportunities that will bring in increased revenue at very little cost to the business.

If you know right now that you will need growth capital in 2013 ? get it as early as you possibly can as it might not be available later in the year ? no matter how strong your business.

So, to the question of: Can your company get a business loan in 2013? The answer is yes ? but, it won?t be easy and the business loan you ultimately get might not come from the source that you thought it would. However, in the end, it is not really about the money (where it comes from) but what you and your small business can actually achieve with it.

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