Business banking: Choosing a lender that fits your
you decide on an institutional loan, you need to select a lender
that's right for you. Just as you would with any other important
choice, take the time to research the candidates. First, you have
to define your needs and how you will use the money. Then, you have
to explore what's available. Banks, credit unions and finance companies
all offer loans, but some are more suitable than others depending
on your situation.
Banks tend to be conventional, cautious lenders, in part because
they are regulated by the government. They are also in the business
of making money, so bank representatives' reputations depend on
how well their outstanding loans perform.
If your business screams out "high risk" to them because,
for example, you have too little cash to invest or collateral to
pledge, you will get turned down.
However, if you can demonstrate a strong ability
to repay through current cash flow or investments, you stand a better
chance of success.
To maximize efficiency and profits, banks have set
minimum loan amounts at about $25,000 to $30,000. The average small-business
bank loan issued is more than $100,000. Most small business owners
don't need this kind of money, so it pays to ask your bank if they
would consider a smaller business loan.
The Small Business Administration recently announced in its 1998
report on small business lending that the country's largest banks
increased their lending to small business more than small banks
did. So large banks are heightening their attention to small business,
but most of the lending is in the form of credit cards and lines
of credit. The majority of cash loans from large banks ranged from
$250,000 to $1 million.
Large commercial banks want to lend to low-risk companies
or businesses offering 100 percent collateral. If you have been
operating successfully for several years and fit one of those two
requirements, you may want to give the larger banks a try.
You may have a better chance of getting a loan through your small
local bank, especially if you have established a relationship with
the banker. However, small banks are disappearing into mergers and
acquisitions -- at least 400 in 1998 alone -- so mid-sized banks
may become the standard community-sized institution. According to
the SBA lending study, the number of mid-sized banks increased more
than any other segment of the banking market.
Credit unions lend money only to their members. Since a credit union
is familiar with its members' personal and job histories, the lending
process is somewhat easier.
Some credit unions offer short-term business loans,
but most concentrate on auto, boat and personal signature loans
of up to $10,000.
It may be easier to get a loan through a finance company than a
bank, but as with credit cards, you pay for the convenience with
higher interest rates. Commercial finance companies typically offer
business loans using accounts receivables and/or inventory as collateral.
When selecting a lender, find out what other services it makes available.
Besides loan and credit options, you'll want to look at all the
ways to make managing the company money more efficient, such as:
- Business checking accounts
- Money markets
- Investment services
- Payroll services
- Check collection
- Wire transfers
- Merchant card service
- Retirement plans
As competition for the small business market increases
among banks, expect greater variety and flexibility of services.
Many large banks have small-business divisions to handle not just
information, but business advice. Smaller and mid-sized banks often
have small business specialists. Search for a bank willing to customize
a service package for your company.