Rising Sales Spur Small-Business Growth

Smalls see opportunities to expand as lending loosens up.

Small businesses are turning the corner, after lagging behind big businesses in terms of sales and expansion opportunities following the recent recession. Small-business owners have more optimism in current economic conditions and in the direction of their own companies. For example, about 60% of small businesses responding to a recent survey by PNC Financial Services Group expect sales to rise in the next six months.

Eight out of 10 small-business owners are hopeful of growing their businesses in coming months amid rising demand for goods and services, according to the survey. "With the start of the baseball season, the economic recovery is on base…heading home. But rising energy prices, elevated unemployment and a recession in Europe could still prevent it from scoring the winning run," says Stuart Hoffman, chief economist at PNC. "These findings show a significant improvement in business expectations and optimism."

But smalls will grow cautiously, holding down costs and taking fewer risks. Moreover, they won't be the engine of job growth they were before the recession. Small businesses will add about five jobs per firm per year, says Andrew Razeghi, adjunct associate professor at the Kellogg School of Management at Northwestern University. That's less than the seven jobs per firm per year that smalls were creating in 2009, he notes in remarks to the House Committee on Small Business. That means that small businesses will create about 7.5 million fewer jobs between 2009 and 2019 than in the previous decade.

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A stronger sales outlook means more loan demand from small-business owners eyeing growth opportunities. About one-fourth of small-business owners plan to take out a loan or a line of credit before September. Loans backed by the Small Business Administration will hit another record in 2012, rivaling the 35% jump in loan amounts in 2011, when they reached $30.5 billion, the highest level in the 58-year history of the SBA.

Many banks are eager to respond. They're reaching out to smalls and adding staff to boost lending. Bank of America, for example, hired more than 100 small-business bankers in the first quarter to support small-business customers. But that doesn't mean that funds will come easily to anyone who walks in the door. Small firms with solid track records and better than average credit are most likely to get the funding they need.

So what does it take to get a small-business loan from a bank in today's economy?

-- An unimpeachable business plan. Small companies need to be explicit with details about how borrowed money will be spent and how it will contribute to business growth.

-- Bigger down payments. If you're seeking a construction loan, for example, expect loan officers to ask for more cash for the project…as much as 50% more than they might have required in 2006. Looking to acquire an existing business? Expect banks to require 20% more up front, or about a quarter of the purchase price.

-- Clean credit. It's not just a plus, it's required. Small businesses, in general, are doing better at maintaining good credit. In February, only 1.46% of small-business loans were delinquent, versus 4.42% of small businesses that paid late at the height of the recession in May 2009.

-- Lower debt levels. Lenders want smalls to shed excessive debt. Expect bankers to be looking for a debt level that's less than four times earnings. As recently as 2006, six times income was OK.

Nonbank lending sources are also providing the capital needed to expand small businesses. Among them: crowdfunding. Supported by the recently enacted Jumpstart Our Business Startups (JOBS) Act, it allows entrepreneurs to raise capital from a large pool of small investors and eases some SEC requirements. Small businesses can seek investors online via CircleUp.com, Kickstarter.com and other websites. Other funding options include peer-to-peer lending, small-business or personal credit cards, and personal savings.

Karen Mracek
Associate Editor, The Kiplinger Letter