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Small Business Funding Alternatives Sought When The Bank Says “NO”

Survey Results Show Banks Missing Opportunity to Satisfy and Retain Valuable Customers

The results of a recent survey of small business owners reveals a desire for banks to offer other options when a loan application is denied. 87 percent of rejected small business loan applicants were not offered any alternative by their bank after they were denied a traditional lending product. However, 69 percent said they would consider an alternative offered by their bank, highlighting an opportunity for banks to satisfy customer need by providing other funding options and ideas.

An overwhelming 87 percent of small businesses surveyed indicated that it is important to have access to a readily available and predictable source of capital, a reflection of today's credit conditions. These results indicate that banks may have a compelling marketing opportunity to provide additional value, secure customer loyalty and responsibly meet demands for working capital even as credit conditions tighten. The survey was conducted online; respondents consisted of 276 small business operators who accept credit cards as a form of payment in their business.

What Happens When the Bank Says No?
An April 2008 survey released by the Federal Reserve found that approximately half of U.S. banks are tightening their small business loan standards, compared with approximately 30 percent that reported doing so earlier this year. Loan decline rates of 70 percent or more are common. What happens to the small businesses that are turned down for traditional financing, and where can they turn next?

Is Your Bank Still Your Best Source?
Even amidst the documented “credit crunch”, 76 percent of respondents believe that banks are still one of the most trusted sources of capital, despite perceptions that banks are struggling financially. Yet 42 percent also place strong importance on having an alternative or back-up source of capital readily available. A total of 69 percent of the survey respondents said “yes” when asked if they would consider an alternative offered by their bank if the bank was unable to provide a loan or offer the full amount of required capital directly.

Life After “Decline”: Benefits to Offering Alternative Working Capital Solutions
A new value enhancing strategy for banks to consider is alignment with an alternative provider of working capital. Through a well-crafted referral program, banks can create revenue from what would otherwise be a dissatisfied customer. Working with alternative capital providers can be a benefit for both the financial institution and the small business customer in what could be dubbed the “antidote” to the credit crisis.
“Working capital referral programs have the potential to support banks and their loan officers in acquiring, retaining and even expanding small business relationships by providing working capital to businesses that fall outside the bank’s regular lending parameters, all without cannibalizing existing credit revenue,” notes Nick Miller, president of Clarity Advantage, a consulting group specializing in sales acceleration engineering for the financial services industry.

Companies who provide alternatives to small business loans and other forms of business financing are experiencing increased interest in their products. A Merchant Cash Advance is an increasingly popular solution for banks that want to retain the profitable small business checking accounts of small business customers rejected for loans or other bank financing. The product can be delivered through white labeled, co-marketed or referral programs at the time the loan is declined. Training of bank personnel is minimized, because the offer is made through a centralized communication mechanism.

Merchant Cash Advance providers are able to approve requests that banks deny because they focus less on consumer-oriented measures of viability like credit scores and place greater emphasis on the business’s track record of success when making funding decisions. Plus, personal collateral is not required and money can be delivered in as few as 3 days.

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Hope For the Best, But Prepare For the Worst

In all likelihood, Murphy’s Law was probably originated by a small business owner.

It’s true that in a small business, anything that might go wrong probably will. It is also true that you can’t possibly plan for everything. However, many smart small business owners know that to take a few precautionary steps early on can save you a world of heartache if when something does go wrong.

Simple Steps to Help Protect Your Small Business

Emergency Fund. Every business should have an emergency fund: a safety cushion of accessible cash ready to handle the unexpected. The proper amount of money for your emergency fund would depend a lot on probable uses. This is a fund that should receive regular deposits to keep it as powerful as possible. Look into accounts that allow regular deposits but might offer benefits for infrequent withdrawals. Be diligent about contributing, and vigilant about keeping its purpose intact; though it may be tempting, don’t spend it elsewhere.

Proper Insurance. How healthy is your business insurance? It is a good idea to spend some time at least once a year to review your insurance plans and options with your insurance agent. Proper coverage in place can help you handle many possible problems as they arise.

Sleep and eat properly. Physical and mental fatigue can certainly be made worse by a poor diet and poor sleeping habits. In taking care of yourself and your small business, sometimes it pays to start with the basics. Make sure you are sleeping well, eating balanced meals and exercising regularly. Some simple attention to the basics your body needs can help you find better focus for your small business objectives.

Identify new sources of help before you need them. Know where you would go if your business was suddenly in a pinch. Play out a couple “what if” scenarios to consider your possible resources. Annually review your credit scores, and identify opportunities and credit lines available with banks or other lenders. Identify any alternative sources of working capital that might work for your needs. Look into each resource to see how much you can get and how quickly. Determine all the things that would need to come together to make each solution effective for you. If possible, have plans and contingencies at least loosely identified so you can reduce your stress in a time of true crisis management.

A small business owner should not lose a sense of optimism, but should be very realistic about what the business might have to face unexpectedly. An expensive emergency situation can quite literally kill a business. Smoothly handling problems as they arise is often the very thing that separates the businesses that survive from those that will not.

Smart business owners know to hope for the best but plan for the worst. They keep their insurance up-to-date and have an emergency fund in place. These business owners understand that to find success in a small business, many challenges will require some form of capital. By taking the time to identify many possible sources of funds to cover a variety of emergency expenditures, smart business owners make Murphy’s Law less likely to impact the business’ stability and growth initiatives.

Success is not final; failure is not fatal: It is the courage to continue that counts."-- Winston S. Churchill

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