Both the number and dollar amount of small business loans increased in the fourth quarter of 2013 for the first time in fifteen quarters according to the SBA Office of Advocacy. Small business loans under $1 million increased by 0.4% during the quarter, up from a 1% decline in the previous quarter.
Commercial and industrial loans (C&I loans) and Commercial Real Estate Loans (CRE loans) are the two segments that fall within the definition of Small Business Loans. The Commercial & Industrial loans accounted for over 94% of the lending in the fourth quarter. C&I loans would include your typical small businesses such as a franchise loans, loans to small manufacturers, wholesalers, retail establishments, restaurants etc. Commercial Real Estate loans would typically be your small real estate loans to office buildings, shopping centers and mixed-use buildings where the rental income is the source of revenue as opposed to the sale of goods and /or services.
Lenders eased their lending standards and experienced greater demand according to the Senior Loan Officer’s Survey. The Office of the Comptroller cited increased competition as a reason for the easing of lending standards.
The increase in competition for small business loans should bode well for borrowers seeking financing. A well prepared small business borrower should be able to shop online for better rates and terms in this marketplace. Those borrowers with strong historical cash flow, good credit, and a sensible business plan should be able to have lenders compete for their business. Lending criteria will vary from lender to lender, so it is important for C&I borrowers and CRE borrowers to connect with those lenders whose criteria they satisfy. All lenders will want to see strong debt service coverage either on a historical basis or for new businesses on a projected basis.
The primary source of repayment for the lender is the cash flow from the business. Collateral is viewed as a secondary source of repayment for lenders if the business fails. Many lenders use some type of credit scoring for small business loans; the FICO SBSS small business loan score is one of the most widely used and is required for all SBA loans of $350,000 and under. Knowing the SBSS score will greatly help the borrower assess the strength of their loan request. Fortunately, small business borrowers can now access their SBSS score and other important credit data in a bQualTM Report at www.bQual.com.
By: Bob Tannenhauser