The recession has turned small businesses across the country upside down. Many have failed, and many business owners have lost their savings and their good personal credit. As we look forward to the end of the recession, there’s evidence that banks are working to boost revenue by introducing new business credit cards to the marketplace instead of increasing business loans.
That’s one trend. But there are others in the credit industry that small business owners should be alert to. For example, vendor credit lines will continue to be the number-one source of small business lending in the country. While cash is king, trade credit is the largest use of capital from business to business and is an alternative solution that more and more business owners will resort to this year to fund their short-term needs. Rather than waiting on traditional funding and credit lines from financial institutions to loosen up, businesses are creating their own financing opportunities.
In addition, the recession has triggered a new breed of alternative funding sources. Social lending networks like Prosper and Lending Club provide small business owners with an opportunity to get loans of up to $25,000 at much better interest rates than those offered by business credit cards. This funding solution removes the traditional lending institutions from the equation and instead allows lending transactions to take place directly between individuals. Keep in mind that you’ll need a minimum credit score of 660 to qualify.
Here are some other trends that are emerging in the post-recession era.
- More discipline: More and more small business owners are focusing on separating their personal credit and liability from their business credit and liability.
- Better planning: The recession has been a wake-up call to the small business community. Now that the majority of small businesses have weathered the storm — with many negotiating lower payment terms with suppliers, lenders, and creditors — they’re developing better capital-building strategies.
- Extra vigilance: Credit-reporting companies have experienced a huge increase in business. Small Business Equifax saw a 300 percent boost in business-monitoring customers. In addition to the use of business information reports, we’ll see a dramatic rise this year in reliance on business credit files to determine the creditworthiness of consumers.
- Credit diversification: Businesses will diversify their banking instead of dealing with one financial institution. Total dependence on one bank to handle all business deposits, withdrawals, checks, savings, credit lines, loans, credit cards, and so on will be a thing of the past. Diversification in business banking will be the new standard for the small business community and banks will have to compete for customers once again.
- Less-personal relations: Never again should the capital available to your business depend solely on your personal credit and personal financial capacity. Your business should have a strong business credit file with a diverse line of access to capital, including a mix of vendor credit lines, lease lines of credit, business charge cards, business credit cards, and bank lines of credit.
The end of the recession has triggered a growing demand for business credit reporting, business monitoring, business information reports, and alternative funding options. This creates a unique opportunity for small businesses that get in front of these trends, because lending institutions will have to compete for your interest and offer more competitive financial products to win your business.