Lending Trends & Outlook

You have decided to embark on your personal version of the American Dream and start your own business. Even with all the planning and high hopes, unless you are independently wealthy, you will likely need to seek some financial backing for your project—if not at the onset, then somewhere down the road.

However, securing a small business loan is no small accomplishment and several experts weighed in on the “do’s and do not’s” as well as what the trends are heading into 2016. We spoke with:

  • Linda McFadden, CEO, XCEL Federal Credit Union, with offices in New Jersey and New York
  • Daniel Sorrell, First Vice President-Team Leader, N.J. Community Lending, Valley National Bank, Wayne, N.J.

Current trends

The late 2000’s economic crisis left small business owners and prospective start-ups in a holding pattern. However, according to the U.S. Small Business Administration (SBA), there has been significant growth in the number of loans and dollar amounts in the past few years, signaling a positive trend.

The latest report shows that fiscal 2015 proved to be a “stellar” year for the SBA as financial assistance programs reached all-time records. Loans to veterans saw a 45 percent increase over 2014, and loans to under-served markets, including women and minorities, totaled $13 billion compared to $10.47 billion the year before.

 

To what do you attribute the rise in small business loans?

McFadden: “When compared with the big banks, our loan process seems easier and we will gladly do small business loans from $15,000-$1 million. I don’t think the big banks are interested in a $35,000 loan.”

Sorrell: “I believe it’s a combination of several items. Banks have begun to feel more comfortable lending to small businesses. After a few rough years, we have seen improvement in the financial condition of the prospective borrowers that approach us for financing. The low interest rate market has certainly contributed to the ability of businesses to borrow. Additionally, the greater emphasis from the regulatory agencies for banks to fulfill their CRA [Community reinvestment Act] obligations creates an environment where lending to small businesses is essential.”

 

Is there a trend in one particular industry/area from which small business owners are looking to borrow? Have you seen an uptick in one segment of the population looking to secure a small business loan?

McFadden:  “We have had a lot of activity helping small business bring on additional employees. The loans are often small enough just to ‘onboard’ the new person and get them started, then the new found business paves the way. A review of our most recent loans shows they are clearly spread out across the spectrum including young entrepreneurs.”

Sorrell: “We’ve noticed an increase in real estate activity, whether it be small businesses wishing to own their own locations or individual borrowers looking to purchase or refinance small investment properties. However, there isn’t one specific group looking to borrow at this time.”

 

Is the current loan trend more for start-ups or existing businesses?

McFadden: “It’s mostly existing businesses.”

Sorrell: “Primarily, Valley prefers to focus on the expansion of existing, established businesses.”

 

What are the advantages/disadvantages to unsecured vs. traditional loans? 

McFadden:The chief disadvantage for the member is that unsecured loans are generally offered at a slightly higher rate and there are limits as to how much money may be available.”

Sorrell: “From a bank’s perspective, unsecured lending is a risky proposition and something we shy away from. Valley exhibits a prudent lending criteria where we do look for secondary sources of repayment (i.e., collateral) on our small business loans.”

There is growing popularity about online lenders. Any thoughts?

McFadden: “I don’t think those online lenders are really your friend. They aren’t regulated as we are and they don’t necessarily have the back-up deposits on hand to secure your loan or to add to your loan. Having the federal government oversee our business is really in the borrower’s best interest and often online lenders just don’t have anyone watching them.”

Sorrell: “I have not noticed those types of lenders being a significant source of competition. Our main competitors remain the national, regional and community banks that operate within our trade area.”

 

Are there any changes in store for 2016?

McFadden: “We expect the current pace of lending to small business to continue through 2016.  Of course, the election plays a key role in that.”

Sorrell: “I believe the government’s continued emphasis on CRA compliance will contribute to added competition between banks in the small business marketplace.”

What tips can you offer for prospective clients?

McFadden: “Borrowing money is serious business for both of us.  Be prepared with the documentation we will need. Try not to borrow more than you need, so perhaps a line of credit may be the answer. Speak with your accountant to get some good solid advice beforehand. And always, always, always protect your credit score because you don’t know what the future holds. The best map doesn’t tell you what’s around the next bend.”

Sorrell: “My primary tip is that if possible, it is a good idea for a small business to maintain an open line of credit with a bank, even if they think they do not need it. It’s better to have such a facility in place and not use it than to apply when you’re under the gun, which is probably the worst time to apply.”

 

No small matter

Like our experts said, seeking a small business loan is no small matter. Being prepared and well-informed is the first step to success. Here are a few things to consider before taking the plunge:

  1. What is your financial status?

Before you even pursue a loan, take a careful look at your records to make sure your business has a strong enough performance record to ensure repayment. Most lenders will require proof of that, so make sure you have documentation. And separate your personal and business finances.

  1. Do you really want to borrow from family and friends?

An old proverb says, before borrowing money from a friend, decide which you need most.

There are advantages and disadvantages when it comes to taking a loan from family or friends. While they might be among the most supportive of your business vision, borrowing money also can put a strain on your relationship—or cause irreparable damage to a family dynamic. Consider the consequences if you have trouble repaying the loan.

Is it worth it? Borrowing from a reliable lending institution offers several things: It will help you adhere to a payment schedule (or run the risk of paying additional fees or defaulting) and there is a much better chance of keeping your personal relationships intact.

  1. What about those credit cards?

Credit cards can sure come in handy—they provide almost immediate funding for a wide variety of business expenses and can help build credibility if used wisely. However, pulling out the credit card too often can result in high interest fees, lower credit scores and a greater chance of falling deeper into debt. A small business loan can help keep your spending in check and keep you out of a financial black hole.

  1. Are online lenders the answer?

With the global financial collapse of 2008-2009 came the emergence of the online lender and its advantages: quicker application process, easy record keeping and, in some cases, immediate access to funding.

With the global financial collapse of 2008-2009 came the emergence of the online lender and its advantages: quicker application process, easy record keeping and, in some cases, immediate access to funding.

But borrower, take heed: online loans sometimes carry higher interest rates.

You also don’t have the in-person attention you can get when dealing with a traditional bank or lender—not to mention you are potentially exposing all your business information to the cyber world. Think it through carefully before deciding which option is best for you.

And when in doubt, ask a reputable financial expert for advice.

Angela Daidone is a freelance writer, editor and public relations specialist. She can be reached at adaidone@aol.com.

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Meadowlands USA

Meadowlands USA

Meadowlands USA is a North Jersey regional publication that reaches people who live and work in and around the Meadowlands (including the Bergen, Hudson, Essex and Passaic County corridor), as well as visitors to our region. The blog edition is updated regularly and the print edition is released six times a year.

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