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Three Things To Do Before Applying For A Small Business Loan In 2020

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The approval percentage for small business loan applications at big banks ($10 billion+ in assets) rose one-tenth of a percent to 28.3% in January 2020, setting  another new post-recession record high, according to the most recent Biz2Credit Small Business Lending Index™.

The economy is strong, and optimism among small business owners is high, which creates a fertile atmosphere for small business lending. Interest rates remain low, which is encouraging to small companies seeking debt financing for their growth plans. The bottom line is that if your business performed well in the past two years, banks will be willing to lend.

Additionally, institutional lenders’ approval rates rose two-tenth of a percent from December’s figure of 66.2% to 66.4% in January 2020, according to Biz2Credit’s monthly research. Institutional lenders keep expanding in the small business lending marketplace. They are able to offer funding at attractive interest rates and terms.

Meanwhile, the approval rate at small banks dipped two-tenths of a percent from 50.6% in December to 50.4% in January. This is not unusual for this time of year; smaller banks process many SBA loans, and many SBA lending partner banks are likely to wait for 2019 tax returns to be filed before granting loans. Small banks are still approving more loan requests than they decline, and all signs indicate another strong year for small business growth.

According to the Bureau of Labor Statistics’ Jobs Report, 225,000 new jobs were created in January, and employment rose slightly to 3.6% because labor force participation rate increased to 63.4%. Many of these jobs are created by small businesses. Meanwhile, new U.S. jobless claims fell to 202,000, a 50-year low, while private payrolls soared by 291,000 in January, the largest gain in nearly five years. 

“Small businesses are investing, expanding, and creating new jobs, and more underrepresented Americans are experiencing upward economic mobility as a result. Income inequality is shrinking, and wages are rising fastest among workers who have historically been left behind, including low-income women, African Americans and Latinos,” said SBA Administrator Jovita Carranza. “The jobs report is welcome news for America’s 30 million small businesses.”

Small business loan approval rates among alternative lenders dipped from 56.3% in December 2019 to 56.1% in January 2020. Alternative lenders provide funding to companies that otherwise might not be able to secure financing from traditional bank lenders. They are good at providing capital during for companies that are in a cash crunch.

The most concerning part of this month’s Biz2Credit Small Business Lending Index is that the approval percentage rate for credit unions reached a new record low of 39.6% in January, down one-tenth of a percent from December.

Credit unions are struggling in small business lending. There is no doubt that they must change the way they conduct business and upgrade their technology or partner with FinTech firms. Otherwise, I can’t see them surviving. Credit unions should be able to process digital loan applications to keep up with the current lending marketplace.

If you are thinking about applying for a small business loan from any type of lender in 2020, here are three things to do before starting the process:

1.    Update your business plan (or create one if you don’t already have one). A well prepared, professional looking business plan can make the difference between acceptance or rejection of your small business loan application.

2.    Gather your 2019 financial statements. If you are planning to apply for small business financing, banks will look for the most recent year’s financial information. Once the calendar passes April 15, lenders are more likely to insist on seeing 2019 tax returns and other financial documents. If your company performed better financially last year than it did in 2018, it is advantageous to include 2019 information in the loan application package.

3.    Shop around for the best deal. With mortgage interest rates so low, banks and other lenders are actively marketing their small business lending products. Borrowers can benefit from the increased competition among lenders. In the old days, people went from bank to bank to comparison shop; today we can use the internet to research banks’ lending rates and terms.

Small business optimism is solid as the New Year began, according to the latest NFIB Small Business Optimism Index, interest rates remain low, and the overall economy is still strong. It is as good a time as ever to apply for small business funding, particularly if your company performed well in 2019.

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