NerdWallet created the CEO series
for small business lending in hopes of providing everyday small business owners with access to the CEOs of various types of financial institutions. The series aims to improve the information asymmetry between borrowers and lenders.
The goal of the series is to help small business owners obtain a better understanding of small business financing through the views of CEOs and senior management. The CEOs answer common questions, including:
- How are the various types of financial institutions different? From community banks, credit unions, to CDFIs and micro-lenders, merchant cash advancers, revenue-based financing, and others, what is the role that these financial institutions play in the business lending space and how are they different?
- What do lenders care about when evaluating borrowers? What can business owners do to increase their chances of obtaining financing?
- What general advice and good business practices do these CEOs, with their extensive experience, have for business owners?
- How do they see business-lending evolving over the next year?
The landscape of small business lending is (and has been) evolving…
Small business financing has become increasingly complex and difficult to navigate. According to the FDIC
, community banks, typically defined by banks with less than $1 billion of assets, have always been “inextricably connected to entrepreneurship” and provided 46% of the banking industry’s small business loans in 2011.
The recent economic downturn and recession, however, led to a credit crisis that re-shaped the landscape of business financing as community, non-bank, and alternative lenders proliferated to fill the gaps in the credit market. In addition, not-for-profit credit unions increased their business lending
during the credit crisis, and there was a recent bipartisan proposal to increase the lending cap from 12.25% of their assets to 27.5%.
…however, the onus is on the small business owner to sift through the myriad information to understand their financing options
Caveat Emptor! Often times, financial institutions have pre-defined loan packages with terms and conditions, but it is a business owner, with his or her completely unique set of needs and requirements, that ultimately bears the burden of figuring out which loan and institution makes the most sense for them.
In evaluating which business loan is the best for them, business owners have to consider many important factors, including but not limited to:
- The current (and future) financial state of their business, including revenue, margin, cash flows, and their overall ability to obtain a traditional loan (often cheaper, in regulated industries)
- Timing/speed of obtaining the required funds
- Uses of funds – does it make sense financially, given additional debt and constraints on working capital?
- How new financing will affect their business operations thereafter – some loan products are repaid through a percentage of revenue (thereby impacting cash flow), some loans have penalties and clauses for repaying early, etc.
- Future implications – terms and conditions of the loan product, banking needs over the longer term, etc.
All said, not all financing is created equal. The participating CEOs all universally advocate that borrowers do their homework, both in critically evaluating their business finances and capital needs as well as the quality and fit of their prospective lenders and counterparties.