With the country going through its worst financial crisis of the last 70 years, it’s not so easy for small businesses to obtain bank loans.

But that doesn’t mean banks have completely turned their backs on small businesses. It just means that owners of these businesses must work harder to get banks to open their lending spigots.

The Big Picture

Financial institutions are definitely curtailing their loan activity. Federal Reserve data show that the total of commercial banks’ business loans has stagnated between $1.5 trillion to $1.52 trillion between May and early September.

Several elements of the credit crunch are limiting loans. First, banks already have so many troubled loans on their balance sheets that they are reluctant to make new ones that carry any risk, says Bob Seiwert, director of commercial lending for the American Bankers Association, or ABA.

“Second, there is a liquidity crisis. Banks need money to lend. If they can’t sell the loans on their books, they can’t get money to make loans to you and me,” he says.

In addition, the economic slowdown has curbed the formation and growth of small businesses, crimping their demand for bank loans.

Banks also report that “the borrowers they see are less creditworthy than a year ago,” says Eric Zarnikow, associate administrator for capital access at the Small Business Administration, or SBA.

The number of loans the SBA guarantees will probably drop to somewhere between 75,000 to 80,000 this year from 110,000 last year, he says. That represents a decline of up to 32 percent.

But not all banks are sitting on their hands. “We’re expecting double-digit growth in our small business lending this year, which is quite a reversal of past years,” says Kent Stone, who oversees much of small business lending for U.S. Bank.

The number and quality of loan applications from small businesses are rising at U.S. Bank, he says. Dwindling competition accounts for much of that.

“A number of our peers, especially in fast growing markets, such as the west, are having troubles. Other competitors continue to change strategy,” turning away from small-business lending, Stone says.

“We’re instilling a sense of normalcy despite times that are anything but that.”

Improve your chances

Experts recommend taking the following steps to improve your chances of receiving a loan in this difficult environment.

1. Establish a strong bond with your bank before requesting a loan. “The most important thing you have with your bank is not money: it’s the relationship you have with the bank,” says Rich Sloan, co-founder of StartUpNation, a small business consulting firm in San Francisco.

You can create a productive relationship with your banker by visiting in person and letting the banker know the important details of your business.

“It’s better to make your first meeting in person than on the phone,” says George Cloutier, chief executive of small business consulting firm American Management Services in Orlando, Fla. “You’ll learn a lot from how you’re treated, even the banker’s body language.”

In presenting information about your business, don’t just focus on past performance. “You want to make sure you present your track record in a way that’s clearly transferable to the future in the banker’s mind,” Sloan says.

By nurturing ties in this way before asking your bank for a loan, “you’re essentially creating a relationship where the banker understands your business and is excited and updated,” Sloan says. “So when you’re calling for funds, the banker doesn’t have to go through the education process.”

2. Be prepared to show banks evidence of your business’ strength. Existing businesses need to show they are making money or will be profitable soon to obtain a loan.

“If you’re running in the red and not generating cash flow, you simply won’t get a loan,” says Cloutier. “Bank lending based on assets was the old way. Lending on cash flow and profit performance is the new way.”

If you are profitable, you must show that clearly to your banker. “You need a good presentation of your current balance sheet, profit-and-loss statement and a detailed budget on how you’re going to make money for the next 24 months,” Cloutier says.

“Talking and waving your hands in the air isn’t going to impress any lenders.”

Giving your banker confidence in the success of your business is even more important at a time like the present, when banks are gun shy.

3. Contact multiple banks. If your regular bank is unwilling to offer a loan, don’t give up.

“Try 10 banks rather than just two or three,” Cloutier says. “Within those 10, it’s highly likely that one or two will be in a mood to lend. Failure on the first two or three is meaningless.”

While you won’t already have developed a bond like you have with your regular bank, institutions eager to lend will be happy to start up a relationship with you as you proceed through the loan approval process.

But you have to be selective in your pursuit. “Be careful not to spend too much time chasing ghosts with banks that just aren’t serious about lending,” says Cloutier.

4. Get to know banks just like they are trying to learn about you. Most of what you need to know you can learn by simply asking the bank’s staff. “Be candid with them,” Cloutier says. “Ask on a scale of one to 10 how interested they are. Also make clear that it’s OK if it turns out you’re not their cup of tea.”

You want to make sure that banks you approach lend to businesses like yours. Some banks focus their lending on mature small businesses rather than start-ups, for example.

“And some banks specialize in lending to firms in certain industries. It is better to do business with bankers who understand the risk of lending to firms in your industry,” says the ABA’s Seiwert.

5. Anticipate your banker’s concerns. Give your banker an honest assessment of the risks in your industry and how you plan to deal with them. But realize that banks still will analyze risk on their own, of course.

However, “you may be able to provide a perspective that the banker has not thought about,” Seiwert says. “And it’s important for the banker to know that you recognize the risks and have a plan for dealing with them.”

6. Show flexibility in the amount of money and the terms you request for your loan. That’s especially important in this period of tight credit. If you sense resistance from the bank to your loan request, consider shrinking the dollar figure.

“That way there’s less skin in the game for all parties, and you will build confidence,” Sloan says. “As you show you can service a small loan, you will have an easier time building to a bigger loan.”

But don’t settle for a loan that is too small to help your business grow. “You could be taking more risk if the loan doesn’t provide a meaningful impact for you,” Sloan says.

You also might want to consider bringing in an outside party to guarantee your loan, thereby easing any concern the bank has about repayment. “If there are people in your network who are angel investors or shareholders, they can act as guarantors to cut the lender’s risk,” says Sloan.

7. Look into SBA loan programs. The Small Business Administration government agency works with lending partners, partially guaranteeing loans that banks otherwise wouldn’t make. “Banks have a level of credit that they will provide on a conventional basis,” notes the SBA’s Zarnikow. “We allow them to stretch the box further to give additional capital to small businesses.”

The SBA will guarantee a 50 percent to 90 percent portion of the loan, guaranteeing about 75 percent on average. In general, the larger the loan, the lower the percentage the Small Business Administration will guarantee. The SBA usually backs loans up to $2 million and as high as $4 million for a few industries.

“The SBA represents a great opportunity to get capital for small businesses,” Zarnikow says. For more information, go to the Small Business Administration’s Web site; one of the agency’s 68 district offices; or SCORE, a small business counseling group that partners with the SBA and has  chapters around the country.