How Low Can Donald Trump Go? Did you hear what President-elect Donald J. Trump just said? I just can’t believe it! Donald Trump said that banks can’t lend? What? Is he right? Say it ain’t so! At best it’s complicated. That’s according to the Wall Street Journal. Bank Business Loans: How do I get one? I guess it depends on who you ask. As one of the top small business lenders we consistently hear the same horror stories from our prospective clients every day. The banks just aren’t lending. I can’t get a small business loan. So what’s really happening? Is it that banks can’t lend or is that that they don’t want to lend to your business? There are 4 variables to consider. First, part of the answer is how banks define the word “small”. It seems silly, doesn’t it? So how big is a small business? According to Wikipedia we can see that the textbook definition of a small business in the U.S. is fewer than 500 employees. Wow! If you ask me 100, 200, or 499 employees doesn’t feel very small. Here’s the truth… Banks do not offer small business loans! That’s right. It’s just not their business model. Wells Fargo who by most standards is the largest small business lender looks for companies that generate at least $20 million a year in annual revenues. Bank of America looks for businesses that do at least $50 million a year. Notice that they don’t look for companies with a certain number of employees. So it’s really all about annual revenue. Maybe that’s the key? Then what makes for a big or small company by revenue? If we look at the Small Business Administration for some better insights (look for SBA Loans), they define a small business as under 500 employees and less than $7.5 million in annual revenue. What happens when you have a business that has under 500 employees and does over $7.5 million a year in revenue? Now can you get a bank loan? Here is where I think the Wall Street Journal is correct. It’s complicated. Maybe it’s easier for the banks to look at what type of business makes up the typical small business. The challenge here is that there are some 700 plus industries that banks need to consider. I know I’d be hard press to tell one from another just by the type of business. Maybe the issue for banks is the structure of your business. Does it matter if it’s an LLC, Sole-Prop or Corporation? One of the keys is whether you have you separated your personal from your business interests? What that means is have you separated your business from your personal credit? If you have, maybe you stand a chance. If not – well – tough luck. (If you’re interested, you can read how to do just that step by step at the sunwisecapital.com blog.) So getting back to why it’s so complicated. The crux of the issue is how the banks define small businesses. Generally, it’s a function of how much you want to borrow against your annual revenue. If you have the revenue, then it’s less to do with employee size and more to do with personal and business credit scores and available assets or collateral to secure the loan. Remember, it’s always about the money. And I’m not talking about the business loan to the owner. It’s all about how much money the bank can earn against their cost to acquire the loan. In plain English, it just costs too much for the bank to lend less than $1 million. They just don’t make enough money on a small business loan for under $1 million let alone $25,000, $50,000 or $250K. A bank has high fixed overhead costs that are built into every loan they originate. They have to pay for their high rise corporate headquarters, regional offices, and branches on every street corner. Not to mention advertising on TV, radio, print and the internet. Then there are all the employees. So you can see how very quickly someone has to pay for all of that overhead. That someone is not the small business owner. It’s BIG business! There is just no money in lending smaller dollar amounts based on old fashion and out dated traditional bank scoring models. This is why the small business owner is left out in the cold. Ouch! Business loans and working capital from Sunwise Capital Let me give you an example. In October 2013 we received a phone call from a Construction company. At the time he was doing about $4 million a year in revenue and was bankable based on his personal credit score (FICO). He was looking for some working capital. The question posed to the client, “Why didn’t you go to the bank for a business loan?” The answer, “Because they’re not lending.” We approved this client in less than 24 hours and funded his request 2 days later. He secured a 10-month unsecured business loan from us for $100,000 with no traditional personal guarantee. One year later the client asks for more money. Same question and same answer. He borrows $150,000. Three months later he needs more money. Same question and same answer. The client borrows another $50,000. Do you think the banks are willing to continue lending in this fashion? Now in January 2015 he calls. He’s in a real bind. He needs $75K real fast. Now you know the old adage. No one lends to you when you need the money – only when you don’t. We fund him for $150,000 (he wanted as much as he could get) with another 10-month business loan. (We don’t ask the question since we already know the answer). Today he’s asking us for more. We’ve approved him for $150,000 but are reconsidering upping it to $200K. Why? Well his revenue is now over $10 million a year. So in 3 years this business has grown from $4 M to $10 million. We’ve financed some $450,000 and will lend another $150K to $200,000. That’s over $600,000! Can your bank do that? I think you know the answer. So in conclusion, “Is Donald Trump right that banks can’t lend? “ Tell me what you think.