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Financing 101: Back to the Basics With Small Business Lending

February 18, 2015, 07:00 AM

It has been widely acknowledged that starting with 2008, the Federal Reserve Board, the Federal Deposit Insurance Corporation, and the Comptroller of the Currency together with the President and the Congress (through enactment of the Dodd-Frank law) brought major changes to the lending landscape affecting small business. In many respects there is far less opportunity and autonomy given the restrictive laws which have been imposed mainly on banks and related classes of lenders. Combine this with the aggressive policies of regulators and monitors who have fostered a climate that inhibits small business lending. There is a parade of bank examiners from multiple agencies who demand a plethora of reporting and accounting.

My banker friends grumble how the slightest infraction or incorrect technicality they commit gets seized upon by a bank examiner who looks upon it as an opportunity to levy a fine and haul new revenue into their respective oversight unit.

This inquisition-style period which has overtaken bank lending continues to diminish bank officers who no longer provide any customer creativity or entrepreneurship to their vocations -- but mainly carry out compliance while offering a few cookie-cutter loans where customers get rejected if they do not meet certain pre-approved standards. The "old days" where customer rapport and relationships between a small business owner and a bank officer have little relevance today.

Another negative influence has been the historically low interest rates at near 0% promoted by the Fed, which makes a lot of small business lending activity unappealing and problematic. Many bankers believe it is more profitable to transact a large loan with a significant business using the same amount of time and effort, in comparison to what is required for a small business deal which may be troublesome, get flagged by monitors, and offers limited return. All of this feeds into an emerging trend, how despite all of the "bricks & mortar" and community marketplace promotion by banks -- more than 10% of Americans no longer use a bank for anything today!

Generally, it appears that this course is continuing for the foreseeable future. However, as a result of this sadness there is fresh opportunity and optimism. The commercial finance industry: factoring, asset-based lending, purchase order financing, and import-export trade credit, largely unregulated, mostly driven by its own peer review standards, has experienced rejuvenation. The small business owners and entrepreneurs who have been frustrated by the shortcomings of banks are now seeking us out.

However, their "discovery" of us has not been without its challenges. While most of us welcome their newfound interest in commercial finance, many of these small business owners come to us "the last minute" when they are amidst a crisis in their business. As much as we want to help them -- and many times we succeed in our "rescue" efforts -- what occurred was unfortunate and there was really no reason for it. This goes back to fundamentals and "Financing 101.”

Before I came to work in the commercial finance sector and for a number of decades, I owned and operated a successful cleaning products business. As I navigated the cyclical "peaks & valleys," this enterprise continued to grow. I learned early on, how important it was for me to identify and secure lending capacity. In some ways, this was a priority that had precedence over sales. It made sense that if I brought in a nice purchase order but did not have the financing in place to fulfill it, I was wasting my time. I was actually putting my operation in jeopardy in many ways. Any misstep I made with a good customer could very well come back to haunt me where I would not be given a chance the next time around. My reputation would suffer if I did not have the financing ready-to-go when my customer was ready. A lack of financing would compromise their confidence in me.

My experience has been that it was time very well spent to investigate what lenders would be a good fit for my business. I learned that the commercial finance firms, specifically factors and purchase order finance people were the most effective for my needs. Although I was paying a little more for their money and services -- they were much more nimble, more efficient and more open-minded in their response than the attention I would receive from a bank. I actually found a purchase order finance operation that had a lot of experience doing deals in the cleaning, maintenance, and janitorial sector. So they understood my issues and what I needed from them.

From where I sit now as a decision-maker on whether or not I should fund, I am amazed at how some astute, sharp business owners create unnecessary difficulties for themselves. They obtain a wonderful purchase order but now they have put themselves under risk and pressure because they lack the financing to back it up. I shake my head when I get contacted from business owners who should know better that: "I need $100,000 or $250,000 by the end of this week..." When I examine the deal, many times I find out that weeks before they could have done some diligence to make sure the financing piece was in place -- even if their deal was not confirmed. Isn't this common sense?

Beyond making my appeal to small business owners and entrepreneurs so they do not get trapped in these situations, I am reaching out to accountants, lawyers, and loan brokers who provide professional services to them: What is wrong with nurturing and mentoring your clients with advance work and information about what commercial finance firms to use? About the benefit of getting pre-qualified and reviewing the opportunity so that as lenders and funders -- we are ready to go when they are ready to engage? Sure, this will cost a modest processing fee, and it will require some upfront time. But, isn't this pro-activity good insurance so that an income-producing purchase order deal isn't jeopardized? Isn’t this in fact, "Financing 101?"

Nelson Goldberg
Senior Business Development Officer | RMP Trade Credit
Nelson Goldberg is a senior business development officer at RMP Trade Credit in Islandia, New York.
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