Since the economic crisis of 2008, credit markets have begun to show signs of improvement, and new micro-lending organizations are sprouting up to fill the demand for small business loans along with traditional banks. Accountants can help their small business clients secure loans by helping them prepare the appropriate materials and by pointing out a few different methods through which they can seek capital.
In the past, small businesses relied on traditional banks and the Small Business Administration (SBA) for loans. The SBA guarantees, but doesn’t actually provide, loans for small businesses. Instead, the bank will service the loan according to guidelines set out by the SBA, and the SBA’s guarantee of repayment hedges some of the risk and incentivizes small business lending.
If your small business clients are actively seeking a loan from a bank that does or does not work with the SBA, you should urge them to have a well thought-out business plan, financial statements, and growth forecasts. According to Jeanne Hulit, the SBA’s New England region administrator, “Banks granting SBA loans are placing increased emphasis on business plans, cash flow and profit forecasts in deciding whether to lend.”
The earlier your client is in the business development process, the more difficult it can be for them to obtain a loan from a traditional bank or a loan guaranteed through the SBA. According to the Federal Reserve Bank of New York, small businesses fall into one or four stages of development:
- Stage 1: start-ups
- Stage 2: have business plans and product samples but no revenues
- Stage 3: have full business plans and pilot programs in place
- Stage 4: have been in operation for some time and have documented revenues and expenses
The New York Fed recommends that, to grow businesses in the first two stages of development, owners should seek capital from non-traditional resources. Non-traditional resources can range from a friend or angel to one of the many, new micro-lending organizations. However, if your client’s business is generating revenue, then that client may be a viable candidate for a loan from a bank or through the SBA.
Although the majority of small business loans come from traditional banks, small business owners can also turn to micro-lending organizations for securing a loan. Micro-lending is a great resource for small businesses that need a small amount of capital. According to Jay McDonald from Bankrate.com, “The industry average micro-loan is $12,000.” Some of your small business clients that are just getting started will be under-funded, and micro-lending organizations are a great resource that can be used to secure the initial, necessary capital infusion.
By passing along this information to your small business clients, you’re further cementing your status as a trusted business advisor; as Sageworks CEO Brian Hamilton notes in another article, you will have become not just an accountant, but “a friend and ally.”
Lauren Prosser is the Director of Professional Services at Sageworks, Inc, a financial information company that provides financial analysis applications to accounting firms and private companies.John Formento, Jr. also contributed to this article.