As the credit markets continue to tighten, an old reliable source of financing for small businesses, the U.S. Small Business Administration (SBA) and its loan programs, is once again being looked at as a critical component in providing liquidity in the market. It is now imperative small business owners understand what is required of them to tap into this source of financing. The SBA lending market has changed dramatically over the past 120-180 days and the effect on lenders in this market has been dramatic as well. Several top SBA lenders have completely left the market with most others pulling back significantly. Losses and defaults are up and can no longer be offset with high interest rates (prime rate is at an historical low and capital costs are relatively high) or premiums earned on the secondary market, as there is no secondary market for SBA loans currently. This means SBA lenders are now approaching loans in a much more conservative manner and assessing risk instead of simply booking sufficient volume to stay ahead of delinquencies and defaults. This is being done on all loan applications, not just yours. There is going to be much more due diligence on the part of the lender and more hurdles for the borrower to jump. The days of 100% financing and fixed rate loans may be a thing of the past, but reasonable financing is still available to those borrowers willing to work a little harder and smarter.
As all of you know the financial world as we knew it has changed forever. Absolutely there still exists and always will exist a variety of financial products and services to serve consumers and businesses. However, the way banks and financial institutions lend money to businesses and consumers is changing dramatically. Gone are the days of ridiculously high amounts of leverage employed by banks and amazingly excessive levels of risk assumed. If you ever felt it was tough to obtain a loan or LOC from a bank before well you haven’t seen anything yet.
About 9 million existing businesses per year apply for funds from a bank and are denied. One of the only options an existing business had to this point to obtain funds was a merchant cash advance. Many merchant cash advance companies exist and may be willing to advance your business cash based on your credit card sales activity. The problem with these cash advances is that they tend to be very expensive and burdensome for a business. These companies take advantage of customers that are in need of an advance. Up until recently no competition existed for these cash advances that presented a very reasonable cost of financing option.
Everyone knows what a FICO score is. If you’re a business owner you better know what a Paydex score is and why it’s important these days. Paydex is the equivalent of a consumers FICO score. It measures your businesses credit worthiness and is being looked at more and more by lenders.
Business credit agencies use this business scoring system to determine the credit rating of small businesses. Dun & Bradstreet and Experian are two of the larger ones. You can simply sign up at www.dnb.com. You will be assigned a number and then it’s up to you to build your credit in a similar fashion as you would your FICO score.
Paydex scores range from 0 to 100. Anything 80 and above is good and where you must be in order to obtain business financing. Below 80, and just like a FICO score, you can have problems.