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(March 26th, 2004) -There has been a lot of recent political noise about how the U.S. Small Business Administration appears to be abandoning its micro loan program. One SBA official termed the agency’s micro loan efforts an inefficient, costly operation.
Perhaps the Bush administration realizes how the SBA misses the mark when it comes to so many small businesses and unique situations that are not served by their cookie-cutter lending policies.
For example, my lending activity saw an enormous ’03 jump from small business retailers and service providers handling a total of $500,000-$5 million in annual volume. Often these are sole proprietor or “mom and pop” businesses that are not a priority to banks and traditional lenders. Even though the SBA can sometimes step in and serve as a loan guarantor for micro businesses, the banks feel that they make very little money in proportion to the additional risk. Processing these loans is time-consuming and costly in comparison to larger transactions, even though these small businesses and the families who run them may account for their largest base of deposits. Lenders need to overcome their negative, cynical perception about micro business. Just because a business is “small” doesn’t necessarily mean it is inferior! There are many micro businesses with one, two or a few people that are very profitable while providing outstanding service or perhaps, manufacturing extraordinary, niche products.
At the same time, micro business founders need to recognize that a bank, even the SBA, is legally required to look at the terms of a deal, strictly from a financial proposition. Especially coming out of the dot-com bust, the lending policies at traditional banks remain rigid and super-cautious, guided by government agency regulators. A banker shouldn’t be blamed for not wanting to jeopardize his career for having made some poor decisions that have left his institution with a distressed portfolio and charge-offs.
Even though they have learned how to deal with rejection when it comes to sales - micro business owners often feel crushed when they get rejected for financing: “ I have the product …I have the order…it all makes sense on paper…so why won’t the bank back me?” They must learn to overcome personal resentment.
Because of the difficulty in obtaining money, many startups and micro businesses are turned off to the vetting process. They become reluctant to take the initiative and they wind up staying small. Here again, the opportunity for financing to a business triggered by the receivables the business generates should erase any of the owner’s timidity.
Many owners make the mistake of not asking for enough credit line consistent with their growth needs, so they are left to aggressively plan and prepare for the second round to nurture the business to the next level.
A solid opportunity for a micro business is to bring value to the receivable that has been created when a service provider or manufacturer for example, has obtained an order, especially from the government or a “Fortune 500” customer. It becomes an important relationship builder for the micro business to have a system for professional presentation of invoices, generating receivables that get paid in a timely manner. By financing those receivables, it gives the micro business the ability to use the money to grow and make more sales, without displaying weakness or creating a hassle to their customer with a demand for immediate payment.
The financing of receivables, known as factoring, is an excellent way for many diminutive enterprises, to obtain a commitment from a traditional bank. A consistent track record here will motivate bankers to do business with this entrepreneur.
Finally, if the SBA wants to curtail its help to micro businesses that typically need $25,000-$100,000---why can’t they at least refer these enterprises to lenders, so in the end, these businesses can obtain the funding they require?
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