How to Chose the Right Small Business Lender

No business can exist for long without external financing. If you are planning on starting or expanding your small business venture, sooner or later you will need to borrow money from a bank. According the department of commerce, 85% of small business's external financing comes from commercial banks. In addition, it is easier to secure financing from a bank that you have an existing relationship. Therefore, it is important that business owners at a very early stage chose the right bank. However, contrary to their promotional messages, not all banks are small business oriented. With this is mind, it is important that business owners conduct research before they chose their business banking institution. The following is a list of criteria that business owners can use in selecting the right bank to conduct business:

 Questions to Ask

 What is the average size of their loans to small businesses? - In general big banks usually make larger loans, and small community banks the converse. Meanwhile smaller banks might be eager to do loans of $20,000 or less, you might not get the same reception from larger regional banks. The opposite is true for businesses that need financing of $500,000 or more. As a result of Federal regulations, many smaller banks are restricted in the maximum amount that they can lend. Larger banks, because of they bigger capital base are usually not encumbered by such restrictions. 

Do they lend to business in your industry?-Most banks tend to lend based on their experience with certain kind of businesses. Normally, they will be unfavorable to businesses that are in industries where the bank has had bad lending experience. For example, there are few a banks that as a rule will not lend to certain kind of businesses like: restaurants, gas stations and constructions firms. 

What criteria is use to approve loans?- To approve business loans, all banks use a combination of the 5C's criteria, i.e.: credit, collateral, character, capacity and conditions.  However, not all banks place the same emphasis on each criterion. For example many banks, especially the larger ones, will focus on the business owners personal credit, meanwhile other banks might be more focused on whether there is enough collateral to secure the loan. The strategy here is to select a bank that emphasis aspects of the 5C's in which your business is strongest. Therefore, if you have extensive experience (capacity) in the line of business, but have botches on your credit report, it would best to find lending institutions that emphasize capacity. 

The loan approval process-It is very rare to find two banks that have exactly the same business loan approval process. Depending on the size of the loan, some banks use a computer based scoring system. On the other hand, the approval process in some banks is done exclusively via unanimous voting by a loan committee. Make sure to ask your loan officer whether your loan will be credit scored or will be evaluated by a loan committee. With the credit scoring process, the borrower has very little control. A credit scoring approval process results in a yes or no answer from the computer, which is usually never overridden by the bank. However, for loans that are decided by a loan committee, you can tip the scales in your favor by making a great impression on the loan officer, and by submitting an excellent loan proposal. 

Bank's track record on small business loans-Not every bank is actively involved in small business lending. Some banks prefer to lend to small to medium sized businesses. Meanwhile some banks lend exclusively to large businesses. To get an accurate picture of the banks in your area that are active small business lenders, you can visit The Small Business Administration's (SBA) website at www.sba.gov or visit  our website at http://www.bizjump.com/Article/Top_SB_Lenders.htm