The State of Small-Business Lending: A Return to Normal?
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Over the last seven years, America’s economy has gradually improved, yet one question continues to be asked about small-business lending: Is it returning to normal?
The question is an important one. Access to capital is essential to those millions of America’s small businesses that are job creators and economic engines in communities nationwide.
Our company, Wells Fargo, serves about 1 in 10 of America’s small businesses and loans more dollars to small businesses than any other bank (CRA data, 2002-2014). So I believe that gives us a unique perspective from the work we do with business owners every day. Here are some insights:
1. The new normal in small-business lending
First, the good news: The lending environment today is as good as it's been in seven years. At Wells Fargo, the number of small businesses with less than $2 million in annual revenue applying and getting approved for credit has steadily increased. Today, we’re working with more creditworthy businesses, with healthier balance sheets and cash flow.
In fact, according to the latest Wells Fargo/Gallup Small Business Index study conducted in November, the percentage of small business owners surveyed who reported feeling good about their company's financial situation (65 percent) was at its highest point since the first quarter of 2008.
And that was good to hear: With more businesses in a better financial position, we’re seeing a more normal rate of loan approvals -- a historical average approval rate that’s closer to the type of environment we saw before the real estate bubble.
The increase in small-business loan applications is driven in part by credit demand as well as banker outreach and relationship building, helping us identify and meet the credit needs of more small business owners.
In short, the lending market is a very competitive one right now, which is great news for small businesses seeking credit. Business owners have clear choices for finding the right financing for their business; these range from conventional bank financing to non-traditional, alternative lending. And, as much as ever before, those owners need to pay close attention to pricing, rates and terms.
2. Challenges still remain.
So, why are some small businesses still struggling to obtain credit? The reality is that even in this improving economy and competitive environment for financing, many business owners are still not credit-ready and need additional guidance.
If a business cannot demonstrate the ability to repay a loan today, it’s important that the owner understand how to increase the likelihood of being approved in the future.
3. Tips for getting a business loan approved
Understanding how loans are made is an area that needs to be prioritized within the small-business sector. Through credit conversations with small business owners over many years, we’ve identified three areas they need to focus on when they apply to obtain credit:
Show that your business generates steady cash flow. Cash flow is a key indicator of a business’ health and its future prospects. When you can show reliable cash flow for your business, your lender can see that you have the resources to pay for new loans.
Make sure your current debt load is manageable. Your lender wants to make sure your business has the ability to take on additional debt and is in a strong financial position to manage its debt payments. Lenders also may look at a business owner’s household and personal debt.
Maintain a good payment history. Before extending credit, a lender needs to be confident that a business has the ability to repay. Your payment history provides an important record of your ability to responsibly pay down debt. That’s why obtaining and using a credit card responsibly for everyday business expenses can be a good way to begin building a payment history for your business.
As the economy continues to improve, more businesses likely will be in a position to obtain credit as they identify capital investment needs and seek financing. At the same time, industrywide, there’s more that can and should be done to ensure every business knows what it needs to do to be credit-ready. We’re keeping our focus on finding ways to make sure more small businesses are able to access the credit they need to achieve their business objectives.