Why America isn’t lending to small businesses
— Jeff Stibel is the chairman and CEO of small business credit rating agency Dun & Bradstreet Credibility Corp. The views expressed are his own. —
The “Great Recession” – the longest since World War Two – will have an even more prolonged effect on the economy if one trend continues: small businesses are unable to secure capital.
Despite significant government stimulus to banks and lending institutions, small business lending is actually down over the past few years. So why isn’t the banking industry lending to small businesses during a period in our history when it’s absolutely essential? The answer has a lot to do with credit-worthiness.
Banks claim it’s hard to find qualified applicants and, for the most part, they believe the majority of small businesses simply aren’t credit-worthy. And in this economy, banks are not willing to take a risk. As a result, business lending suffers.
The latest statistics from the Federal Reserve Bank of New York show more than 75 percent of small businesses that applied for a loan during the first half of 2010 did not receive the credit they needed. During hard times such as these, businesses need capital more than ever; it spurs growth, innovation, and job creation. Businesses are in a Catch-22.
Compounding the problem is that businesses applying for lending don’t fully understand the importance of business credit. It’s easy to blame the banks or the economy, but that won’t solve the problem. There is one thing businesses can do: improve their credit ratings.
Below are my top three steps any small business can take to improve their credit:
- Pay your bills on time. It should go without saying that your credit scores are largely dependent on how you treat the credit you are given. Pay your bills on time, all the time. There is no trick here, but in this economy it’s not easy.
- Report vendors and partners that you do business with regularly. Many of a business’s creditors do not report back to the credit agencies. To make matters worse, transactions are usually reported only when things go wrong. But there is a bright side to this problem: many credit agencies allow you to report your trade references directly. For instance, you can furnish trade references to Dun & Bradstreet Credibility Corp and, once verified, they will be included in your credit report.
- Provide Information. You may be surprised to learn how little is really known about most businesses in America. Given the enormity of the market and its constant state of change, it’s nearly impossible to keep up. There are approximately 30 million businesses in the U.S. and more than 600,000new businesses created each year. Credit agencies are constantly playing catch-up. Many of these agencies allow you to be proactive and provide more information about your sales, profits, number of employees, stores and other factors that affect credit. All of this will help to build a complete report which inevitably leads to a more accurate credit score.
Ultimately, every business owner should know their credit rating, whether the business is currently looking for credit or not. Business credit ratings are universally leveraged by Fortune 500 companies, government agencies, banks and financial institutions alike to make informed and independent credit decisions. Most business owners agree that it’s good to have transparency with respect to sales and expenses. It’s the same with your credit rating.
Think of your credit rating as an early warning sign against unsavory business conditions. And changing a negative rating takes time. Just as it’s better to study for a college exam over the course of the semester versus the night before, so too is it good to be proactive with your credit.