Will lenders loosen their purse strings this year, or do small businesses have to get creative?

It appears they are starting to lend more freely now; especially thru the SBA program. The word I get from certain banks is; "Please bring us more business plans".

I am hopeful that banks will get back to lending to businesses as easily as they did in the late 90s, but that may take a couple more years.
After all; our lending problems were due to bad mortgages, not bad business loans (I'm over-simplifying, of course, but I hope you get my point).

Deregulation allowed banks to get too big, and in the process, to ignore the clients that helped them get that way...the everyday depositor. Further legislation will likely make it impossible to ever return to the free credit days of the 90's.

However, as long as a business can show a good balance sheet and positive cash flow there will always be someone or some bank willing to lend to them.

I think the creative small business will always have an advantage over the entrepreneur who thinks down the middle, but creativity in the face of finance can never take the place of having a product or service that the public actually wants and needs.

I write on Canadian business but somewhat appropriate I think ..

Canadian chartered banks, usually by virtue of their 'relationship' with business owners and entrepreneurs are in a position to pass on valuable financing tips and information on business loans and working capital for start up or smaller firms. Although the banks are a solid source of such information the banks themselves, by virtue of their charters and credit policies, are unable to directly satisfy the financing needs of the customer.
Business owners are often therefore encouraged by banks to 'self finance 'the venture via equity or owner capital and commitment. It is clearly a misconception that banks play a key and major role in the financing of new ventures. Possibly the only exception to this statement is the fact that the banks offer up, in their role as administrators, the Government Small Business Loan, which is a Canadian federal government program providing loans up to, in some cases 500,000.00$ for purchase of real estate, business assets, or leasehold improvements. (The more typical loan amount maximum is 350,000.00$)
We may or may not agree with Canadian banking policies on start up and young venture financing, we should however appreciate the banks stance - they are lending out our capital at very low rates, with potential to lose the entire investment if your firm can't repay loans and financing.
How can the small or newer business succeed in financing options? Businesses of the size that we are discussing need thousands, literally millions of dollars of financing to fuel their growth in Canada. In our commentary that we are providing it is important to note that as companies develop along the 'stage of development 'timeline they of course have much more access to traditional bank and private equity financing. We are primarily talking about earlier stage companies, who may be still developing products and services and may not be yet profitable as they start delivering and billing for those products and services.
So what are the immediate challenges of firms that are unable to provide traditional financing and what are, more importantly, some immediate solutions?!
The challenges tend to be painfully obvious to the Canadian business owner or financial manager that has worked to get traditional bank and equity financing. They are as follows:
Perceived industry or product risk
No collateral
Uncertain financial projections
Limited Performance history
How can the Canadian business entrepreneur overcome these very traditional roadblocks and challenges? There are a number of ways.
First of all, all alternative methods of financing should be pursuing. Alternative financing methods are most non dependent on the above noted risks and challenges. Those alternative methods of financing might include:
*Business Angels or strategic partners (think suppliers!) for short term arrangements
*Equipment Lease financing
* Sale leasebacks on equipment already purchased and paid for
*Asset based lending arrangements that provide working capital facilities against initial receivables, inventory, and purchase orders (These facilities don't have the same requirements as banks)
* Sr Ed Tax Credits - Customer who have filed claims can finance those claims for cash
* Invoice / Receivable Financing - Immediate cash for your firm's receivables (these facilities can be of any size)
In summary, newer or smaller firms fall into the ' void ' area of financing, where very few traditional financing strategies can be implemented, at a time when cash flow and working capital are most critical.
Business owners should review non alternative strategies which can be of great assistance in early growth periods

Just as a follow up: I'm finding very few banks that are truly willing to lend. For the most part, bank loans are a simple matter of collateral and credit history. Very little business analysis is done in a banks underwriting process - This has been true for decades unfortunately.
That said; I'm ever hopeful that there are banks out there that actually read a business plan rather than just look at the cash flow projection, then file it with the other paperwork.

Here's the problem with lending based on collateral and credit history:
The success of the business will determine future financial outlook, and the business owner is proposing to pay the loan off in the future.
Consider two options:
1. A great business plan from an insolvent entrepreneur.
2. A poor business plan from someone currently working full-time at a job he's planning to leave as soon as he gets funded.
Which one is the better bet?
Which one will be bank be more likely to fund?

That's one of the problems with the underwriting process for most banks.

Thanks,

Tony

I'll pick the great business plan every time!