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Change has swept through industries, society, and careers. Over the last few years, change and its companion (information technology), is altering the face of small business financing. What your banker doesn't want you to know is that the relationship-based banking in the small business financing market is now often irrelevant. The decision of loan approval is determined by a computerized credit scoring program, unless a business requires a loan or credit product over $100,000.
Automated credit scoring reduces the subjectivity of the loan process and improves the bank's profitability. Having a relationship with your banker does help in some areas, but not with automated credit scoring.
It may benefit some companies when the subjectivity is removed. For instance, a commercial banker with many failed restaurants in his credit portfolio may be more inclined to decline your loan.
The credit scoring system would remove any bias present in the decision-making process. The other possible benefit is credit scoring removes the need for a business plan and only financials are required.
In light of the "new rules" governing the small business financing process for small businesses, the business owner can adopt these strategies:
Small Business Financing Strategies for the New Lending Environment
Assess Credit Needs: If the amount needed is closer to $100,000, apply for $110,000 or more. Usually if the bank wants a business plan, it might not be using a credit model.
Get Your Credit Report: Before making a loan or credit application, obtain your credit report and check for errors and omissions.
Be Accurate: If you are applying for less than $100,000 and the bank is using credit scoring automation, go over all questions for the loan or credit application. Make certain the data you provide is accurate and ask questions to understand the information in the application.
Watch Your Code: Make sure you provide an accurate description of your business. The bank can code your company by NAICS (North American Industry Classification System) or the dated SIC codes. Inaccurate coding can alter the outcome of the approval.
Know Why: If your application is declined ask for an explanation or a "human" review.
Find a Bank: Consider the type of bank you select for applying for small business financing. A larger bank or institution will use the automated credit scoring system more. Seek out local community banks or specialty banks for a particular industry.
The new changes to the small business financing market represent an intensifying competitive industry. Many non-bank players (eg.Intuit, State Farm, GE Capital Corp.) are forcing banks to adapt to the market or lose market share. For the small business owner, this means a greater choice and service as all companies wake-up to the size and power of small business.
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