Money seems to be cheap these days: interest rates are low, and banks can borrow from the federal reserve at a very reasonable 2.75 percent. Venture capital cash is piling into dubious Silicon Valley business ventures faster than it can be spent. Wealthy gulf states are looking all over the world for somewhere to invest mountains of oil money.
With all this cash looking for a home, it can seem vexing that it’s difficult for the owner of a good small business to get money to finance a well-thought-out plan.
Parag Nevatia of EZ Funding Solutions says the key to understanding why it can be difficult — and to eventually getting approval — is to think like a banker. “You’re not going to give money away over a handshake,” he says. “Who are you? How can I trust you? What happens if you can’t pay me back? And most importantly, show me where the money is going.”
Nevatia is good at thinking like a banker because he used to be one. He worked in banks from the mid-1990s through 2010, starting in sales and later working in commercial lending and finally becoming a specialist in small business loans. Today his Metuchen-based business consults with small businesses to help them gain approval for loans from the bank and from the federal Small Business Administration.
Nevatia says many small business owners are caught off guard when they submit a loan application and the bank replies with a list of 25 detailed questions to answer. It can seem like a lot of hoops to jump through. Nevatia says banks mostly just want to be assured that a detailed, sound plan for spending the money exists, and that all foreseeable risks have been accounted for.
Nevatia says there are three main forms of lending that small businesses use:
The most popular are conventional loans from banks in which banks lend out money guaranteed by some form of collateral, to businesses that show they have a good enough cash flow to pay back the loan.
Before the great recession,those loans were very easy to get. Too easy, in fact. “From 2000 to 2007 banks were throwing money at people, almost literally on a handshake,” Nevatia says. “ They would look at the numbers, but the numbers were good back then.”
That all changed after many of those bad loans, in addition to those made on the mortgage market, came back to bite the lenders and destroy the U.S. economy. “People realized something crazy was happening,” Nevatia says. Suddenly loan officers became much more inquisitive about what the money was being spent on. They would not let borrowers take out loans that were 125 percent of the collateral they were offering. “When the bubble burst, a lot of banks went out of business,” Nevatia says. “The ones that stayed in business had to redo their lending guidelines.”
Following conventional loans, Small Business Administration loans are the next most popular funding source. The most common is a “7a” loan, which is used to get operating capital. These loans were a $23.5 billion industry at their peak, and are now about $17.5 billion. The second type of SBA loan is a “504” loan, which is for real estate and equipment.
Nevatia says one common mistake he sees from business owners seeking any type of loan is that they don’t know what exact information the bank wants to see. Some of this confusion stems from the fact that many borrowers see a bank salesperson first, whose main goal is to get an application sent in, regardless of whether it will be successful. “I don’t know if you would call it a mistake, or a lack of awareness, but they get misled in the wrong direction, which causes eventual disaster, which is a declined loan, and then complete dissatisfaction with the system.”
This is related to another point of frustration with borrowers, which is the slow pace of approvals. Nevatia compared the small business banking system to a popular restaurant where everyone is having meals cooked by the same chef, resulting in a 40-minute wait for dinner. In this analogy, the chef is the loan officer. Either way, it’s a bottleneck that frustrates customers.
Nevatia grew up in India and moved to the U.S. in the 1990s. He started off at a retail job and applied to work at a bank across the street after the store’s accountant recommended him. He worked his way up through the ranks and eventually left to start his own business, which he has run for the past 10 years.
“People should not be afraid of presenting themselves to the bank,” he says. “It comes down to very simple logic. The bank wants to see that after you spend all your money, you have a buffer. If they can figure out that formula, things will get much easier in the financing world.”