Why Small-Business Lending Is Such a Confusing Mess - NYTimes ...

This is my first post for You?re the Boss. I hope to add my two cents by shining some light on the state of small-business lending in the United States.

It might help if you understand what I do in my day job.?I am a small-business owner myself.? Two and a half years ago, like millions of Americans in the Great Recession, I lost my job ? a cushy corporate job with a company where I had worked for a decade and from which I had expected to retire. The company, Advanta, went bankrupt.

The day after I was fired by the bankruptcy trustees, I started my own company, MultiFunding.?The mission of MultiFunding is to help small-business owners and entrepreneurs through the challenges of getting the loans and working capital they need for their businesses. We serve as brokers, helping business owners find the right sources of capital for their companies.

Over the past two and a half years I have worked with hundreds of small-business owners across the country in all types of industries and at all stages.?We have seen some companies that are exploding with growth and others that are exploding with too much debt. We have seen some companies with too few sales and others with more sales than they can handle. We have seen small-business owners who almost seem to be printing money and have little trouble finding financing and others who can?t find it anywhere. And of course, we have seen many companies that fall somewhere in between.

These experiences have convinced me that the small-business lending market is poorly understood ? and with good reason.?There are now loan products out there with annual percentage rates of 4 or 5 percent and others as high as 60 or even 80 percent.?In part, this is the unintended consequence of the big banks? tightening up their lending; that tightening created a vacuum that has been filled by a whole new world of alternative lending companies that have opened to take advantage of the situation.?Many of these alternative lenders are backed by hedge funds that demand high returns.?Many small-business owners find dealing with these companies painful, but in many cases they feel they have no choice.

In our efforts to match borrowers with lenders at MultiFunding, we never work for the lenders. We are always trying to help the borrowers get the best loans for their situations: the lowest possible price with the best possible terms. We never take upfront fees from our clients, and we work purely on a success fee. And we only take on clients we think we can help. In other words, we eat if we are able to get successful outcomes for our clients; if not, we?re out of luck.

Going through this process, over and over, we have learned a lot of valuable lessons that I hope to share with you on this blog. Here are three broad themes that I plan to cover.

Small-Business Lending Is a Highly Inefficient Market

Few owners have the time to investigate the ins and outs of the credit markets. The processes are confusing and overwhelming.?If you type ?small business loan? into Google, you will find a myriad of options but little help figuring out which ones make sense for your company?s particular situation.?If you stop in at a branch of a large bank, you most likely will meet employees who are not really empowered to help you and do not really have time to dig into the nuances of your business. I will try to bring some clarity to this situation, so that perhaps a few more owners will know what to expect and will make informed choices. And perhaps the market will become a little more efficient.

Small-Business Lending Is a Confusing Mess

Why has there been so much less lending the last few years? Have the banks simply stopped making the too-risky loans they were making before the economic crisis hit? Did they overreact and stop making even sound loans to sound companies? Or did lending drop because after the recession, businesses started to retrench and their demand for credit declined? Did all banks stop lending or was it just the big banks? It is very hard to get definitive answers to these kinds of questions.

One reason is that we can?t even agree on important definitions. The Small Business Administration reports on lending activity, but nobody knows what percentage of overall lending the S.B.A. accounts for.?The big banks release their scorecards on small-business lending but they define small businesses as those with revenue of $20 million or less. For its reports, the Federal Reserve defines small businesses as having revenue of $50 million or less. For its reports, the Federal Deposit Insurance Corporation defines small-business loans as those with balances of $1 million or less. The merchant cash advance lenders and factors do not release reports at all.

Many Small Business Owners Are Still Reeling

We have been reading reports that the recession is over and that the economy is on the mend. I can assure you that for most small-business owners that we talk to at MultiFunding, this is far from the case.? Many are still reeling from the recession and struggling to catch up. Working capital is a fight. Banks are not easy to deal with, and fair loans are tough to come by.? If you own a retail or service business, it is even harder.

I plan to dig deeper into these issues in coming posts.

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