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Business banking: Choosing a lender that fits your company

Small Business BasicsIf 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.

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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.

Large banks
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.

Community banks
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
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.

Finance companies
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.

Service options
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:

  • Deposits
  • 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.


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