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Lenders to SMBs: What’s in your wallet? Print E-mail
Friday, 02 October 2009

By John Goff
As CFOZone’s Matthew Quinn reported this week, lending to smaller businesses seems to be on the upswing. Even though the Small Business Administration reported that it approved about a third fewer loans this year, dollar volume of approved loans in September hit the highest level since August 2007. Indeed, in the fourth quarter, total loan volume topped $3.3 billion, an 18 percent bump up from the Q4 in 2008 -- and almost back to levels seen in 2007.

While banks may be bumping up their lending to SMBs, they’re also ratcheting up their scrutiny of potential borrowers. According to a survey of global lenders, cash flow information tops the list of information banks look at when analyzing SMB loan applications these days. In fact, 70 percent of the respondents said cash flow is the most important factor in deciding who gets a loan and who doesn’t.

What’s more, an even higher percentage of the lenders -- 72 percent -- said cash flow information would likely be their top concern in the coming two years.

That’s a big difference from a year ago. Only 58 percent of surveyed lenders said customer cash flow was their No. 1 consideration before the capital markets seized up in 2008.

The survey, which was conducted by The Banker for the International Federation of Accountants, yielded some other choice bits, as well. Despite the recent bashing of the Big Three credit-rating agencies, lenders to SMBs still weigh credit ratings heavily in assessing a loan request.

About 28 percent of the respondents said a company’s credit rating was top of mind when examining its financial condition. But 44 percent of the respondents said it’s like a potential customer’s credit rating will be ‘very important’ in making a lending decision in the coming two years.

Having decent assets won’t hurt, either. While cash-flow appears to be king with lenders, well over half of the respondents said collateral will be a vital consideration when analyzing potential customers in the next few years. Before the financial crisis struck, that figure was closer to 38 percent.

And the least important factor? Financial reports accompanied by a compilation report or another form of assurance. In contrast, lenders to smaller businesses said they continue to rely heavily on financial statements accompanied by an audit report.

Apparently, the opinions of audit firms still carries some weight with lenders.

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