Editor's Note: Learn from a panel of experts and entrepreneurs who have successfully financed their own ventures and are helping others do it at the Thought Leaders Live 2013 event May 29, in Long Beach, Calif. Event and ticket information can be found here.
The words good news and commercial lending haven't been common in the same sentence for years. However, several recent developments in commercial lending offer signs of easing from tightfisted lenders.
"Necessity is the mother of invention, so people have been finding creative ways to get financing," says Portland, Ore.-based business expert Steven Strauss, author of Get Your Business Funded: Creative Strategies for Getting the Money You Need. "But it's actually a pretty good time to go out and get a business loan." Legislation, stimulus money and a recovering economy are all contributing to a better commercial lending landscape, he says.
When it was signed into law, the Small Business Jobs Act of 2010 established a $30 billion fund that encourages lending to small businesses by providing capital to qualified community banks with assets of less than $10 billion. The Small Business Lending Fund provides those lenders with low-cost capital with an interest rate as low as 1 percent if they best their 2009 small-business lending levels--a strong incentive to dole out the dough.
SBA chief Karen Mills is hopeful about the community bank option. "I've worked with a lot of small businesses over the years. They like the relationship they have with community banks," Mills notes. "Those lenders know what's happening on Main Street often better than anyone else."
But the lending activity isn't only in small banks. On the heels of becoming the No. 1 SBA lender in the U.S. in 2010, financial services firm JPMorgan Chase announced in April that it would loan $12 billion to American small businesses in 2011, a 20 percent increase over its 2010 commitment. During the first quarter of 2011, Chase increased its lending 64 percent to businesses with annual sales of less than $20 million.
State and regional economic development agencies have also beefed up specialty lending programs, often focused on economically challenged communities or targeted toward specific sectors, author Strauss says. While it's designed as a tool for real estate site selection professionals, Strauss recommends ecodevdirectory.com as a useful tool for small businesses seeking state or regional loans, since it provides links to a wide variety of economic development agencies nationwide.
Hunting For Money? Start Here
The "money is tight" mantra has been such a constant since the financial crisis began that many business owners might give up the search for cash and financing before they even begin. In addition to better commercial lending prospects, there are some places where the credit crunch is easing.
New SBA programs. Ever since the Small Business Jobs and Credit Act was signed into law in September 2010, loan limits on several lending programs were raised--some permanently, some temporarily. A survey released in March by the National Association of Development Companies found first-quarter SBA average loan value was up 20 percent and the total number of loans was up 13 percent. In addition, new programs, such as the Community Advantage pilot program, which expands access to smaller loans in underserved communities, as well as loan program changes, such as a temporary change to the SBA's 504 loan program to allow commercial mortgage refinancing, give small businesses a greater number of financing options.
Equipment leasing and financing. The Equipment Leasing and Finance Association's (ELFA) members have been on a lending tear lately. ELFA's monthly Leasing and Finance Index, which reports economic activity for the $521 billion equipment finance sector, shows that business volume for March (the most recent data released) was $6.2 billion, up 44 percent compared to the same period a year earlier. That's also a 51 percent jump over February.
Credit Unions Get Their Caps Off
While only offered at approximately one-third of credit unions, business loans are the fastest-growing segment of these member-owned institutions' loan portfolios, with double-digit growth reported in three of the past five years. In 2009 and 2010, however, this growth dipped to 9.9 percent and 6 percent, respectively.
Part of the reason is that credit unions are saddled with a 12.25 percent asset cap, which has been in place since 1998. The cap means that they can't extend more than 12.25 percent of their total assets in business loans. According to the Credit Union National Association (CUNA) in Washington, D.C., 360 credit unions are at or quickly approaching the cap, accounting for about 60 percent of credit union business lending.
Legislation has been introduced in both houses of Congress to change that. In March, Sen. Mark Udall (D-Colo.) reintroduced the Small Business Lending Enhancement Act, which more than doubles credit unions' current small-business lending cap, raising it to 27.5 percent.
In April, Reps. Ed Royce (R-Calif.) and Carolyn McCarthy (D-N.Y.) introduced the Small Business Lending Enhancement Act in the House, also raising the current credit union member business lending cap from 12.25 percent to 27.5 percent. CUNA estimates that raising the cap could account for an additional $13 billion in small-business lending in the first year after implementation, helping to create nearly 140,000 new jobs.
The bills have widespread bipartisan support, says CUNA senior economist Michael Schenk. "They're just looking for legislation to attach them to," he says.
And while commercial lending at credit unions has slowed--largely because of this cap--Schenk is quick to point out that many credit unions have not reached their caps yet and that credit unions often offer advantages for small businesses, including lower interest rates and easier qualifying terms.
"Because credit unions are member-owned financial cooperatives, we don't have to make a lot of money," he says. "You'll often find interest rates and fees lower than at commercial banks, and because small-business borrowers are members, the credit union leadership is often more likely to have more flexibility in lending to them."
Where Angels (and VCs) No Longer Fear to Tread
After contracted numbers in 2008 and 2009, the Center for Venture Research at the University of New Hampshire's 2010 Angel Market Analysis showed a 14 percent increase in investment over the previous year.
In March, the National Venture Capital Association (NVCA) reported that first-quarter 2011 dollar volume increased, but deal volume decreased. However, NVCA president Mark Heesen says there is a lot of good news for entrepreneurs. While the downturn meant companies didn't get acquired or go public, and VCs had to pour more money into their portfolio companies to sustain them, that's changing. More companies are getting to their cash-out phase, so VCs will be looking for new opportunities.
"We expect to see venture capital firms go out and raise new funds, either later this year or early next," Heesen says. "When you raise a new fund, you're starting over, so you're going to consider earlier-stage companies because you have the ability and the money at that point to start looking at new ideas and new companies."