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Firms Find the Lending Rules Have Changed

Going forward, business fundamentals will be more important than owners' personal finances.

A very different credit environment will face Main Street businesses that seek to expand in the coming year or two, as economic growth gradually picks up. Following the Wall Street financial meltdown, credit that had previously been relatively easy to obtain effectively dried up. For most businesses, that didn’t matter much; they had little desire to borrow while the economy was shrinking and demand for their products and services was on the wane. Those businesses that did seek financing to help them weather the recession found higher collateral requirements and less favorable terms. And with lenders much more skittish about risks, many credit-seekers simply couldn’t qualify.

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Now that consumer demand is starting to pick up, demand for credit is beginning to rise, and banks are generally prepared to offer financing to solid customers. Large banks are, in fact, sitting on piles of cash and are eager to lend it out, while small institutions are looking to make up through more business lending what they have lost in volume in residential lending. That market is still woefully thin.

But the landscape that must be navigated by business owners seeking to expand and would-be business owners planning start-ups is very different from the precrash terrain. Some previously well-used sources of credit are now out of reach.

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First, home equity loans are much tougher to get. With house values likely to drop an additional 2% this year, and lenders tightening up on creditworthiness, fewer business owners can tap them for funds. Already, the volume of home equity loans is down 5% this year.

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Using credit cards or personal lines of credit to float a business start-up or operation is also hindered by regulators’ push for tighter standards and limits on such credit. Even turning to personal savings is harder; personal worth is down 21% from its precrisis peak.

Commercial loans, however, are easier to nail down than in recent years. About half of lenders say that they have recently loosened standards for large loans to businesses. A third of lenders say they’re looking more favorably on smaller loan requests.

They’re insisting, however, on rock-solid business plans that offer a clear picture of how the firm intends to repay the loan, its cash flow, as well as contingency plans. Business owners’ assets will matter less, and a sound business plan…more.

Business lending has already begun to accelerate, reflecting a rise both in demand for financing from small firms ready to hire and buy new equipment and in banks’ willingness to take the risk. Small business loan volume will grow 4% this year. Total business lending will be up 6% by year-end. Those are the first increases since 2008.

If you’re contemplating borrowing, the first places to look to are small banks. They’re eager to boost business lending to nearby firms. Most didn’t tighten lending standards as much as their big brethren, and they know the local scene, so are more likely to be flexible on conditions.

But you may get a better reception at a large bank than you have in the past, as well. JPMorgan Chase, for example, is hiring 250 bankers who will focus exclusively on small business concerns. The megabank intends to increase its lending to smalls by one-fifth. Already this year, Chase has upped its total business lending by 64%.

Meanwhile, there’s little danger that interest rates will rise swiftly, choking off demand. Although the Federal Reserve will tighten credit next year, lending rates will remain in a fairly comfortable zone for some time, with prime no higher than 4.5% by 2013.

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