'Unconventional' Loans Becoming the Norm
A new poll shows that small business owners are being divided into three groups by lenders, and the interest rate and type of loan granted is based on this categorization.
The poll also reveals that many small businesses are going to hedge funds and other nontraditional lenders to secure the financing they need, having failed to obtain loans through the nation's banks and the Small Business Administration.
As a result, Philadelphia-based MultiFunding contends in its First Quarter National Lending Snapshot that there is a "collateral crisis" facing the more than 30 million small businesses in the United States.
MultiFunding, a small business loan adviser, believes that the situation is not adequately reflected in the data published by the nation's leading lenders. The situation is particularly challenging for small businesses with incomes under $1 million per year.
"It's ironic," MultiFunding CEO Ami Kassar said in a statement. "Small businesses are a key growth engine for the economy, and in this economy (they) cannot secure the loans they need to run or grow their businesses."
MultiFunding divides small business owners into the following three groups: asset rich, marginal and nonlendable.
Asset rich owners, which constituted 31 percent of the survey, have assets and/or cash. They are fortunate in that they still have equity left in their homes, buildings and equipment that is sufficient to meet the collateral requirements of banks and SBA lenders.
These borrowers benefit from interest rates between 3 percent and 8 percent a year. Ironically, the government-supported SBA programs favor this group. They can benefit from a commercial mortgage or a loan program backed by the SBA.
Marginal owners, or 47 percent of the survey, fare well with credit and cash flow but do not have assets backing their business. Thought of as "B Borrowers," these businesses will have to turn to factoring, merchant cash advance loans, unsecured loans and private money loans. They pay a high premium due to their lack of collateral.
Nonlendable owners, or 15 percent of the survey, are not eligible for financing due to bad credit, poor cash flow and lack of collateral.
The poll found that, in today's economy, collateral is a key factor in determining interest rates. Credit and cash flow, previously important in assessing the credibility of a small business, have taken a backseat to equity on their balance sheet.
Kassar noted that only 20 percent of small businesses are eligible for SBA loans.
"For the most part, this can be attributed to small businesses having to present collateral that is equal to the loan amount they need," he said. "Odds are great that their collateral has eroded due to the decline in commercial and residential property values.
"Consider that 47 percent of small business loans received by our respondents are 'unconventional' in nature and not going through traditional small business lending channels."
The 250 poll participants were either established business owners or entrepreneurs that sought to purchase an existing business. All had annual revenue averaging $750,000 and sought an average of $325,000 in funding. The survey did not include startup entrepreneurs or businesses.
Contact Ted M. Natt Jr. at firstname.lastname@example.org.
More like this story