Need a small-biz loan? Rush before the rate hike

Small business loans
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As the Federal Reserve examines when it might increase interest rates, consumers and business borrowers are contemplating what the hike might mean. Higher rates are not necessarily a bad thing for small-business owners.

In general, the historical evidence suggests that rising interest rates is overall a positive for expansion of commercial and industrial credit. This is likely because the Federal Reserve, financial institutions and businesses are all responding to improving economic conditions. Small companies have been able to borrow rates at historically low interest rates for several years at this point. While that is advantageous for most entrepreneurs, the reality is that banks have simply not been able to see much of a profit when they make loans. This has essentially discouraged them from providing financing to small-business owners.

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Before the Great Recession, loan-approval rates hovered somewhere around 40 percent for big banks. During the darkest days of the post-Lehman collapse and the ensuing credit crunch, they granted less than 1 out of every 10 loan requests. Fortunately, as the economy improved, they gradually got back into the small-business lending game.

According to the most recent Biz2Credit Small Business Lending Index (February 2015 figures), big banks ($10 billion+ in assets) approved 21.5 percent of small-business loan requests in February 2015, up from 21.3 percent in January. Further, loan approval rates at big banks have increased consistently for 10 out of the last 11 months, and a year-to-year comparison shows that they have increased by 12.5 percent.

Part of what held them back is that the loans were not very profitable. In fact, it is the reason why that when the big banks do make small-business loans, they typically want to make them in amounts of $2 million or more.

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The Federal Reserve will only raise interest rates when they see that economic conditions are getting better. Simultaneously, when conditions are improving, business demand for loans rise, and banks respond by increasing their supply of loans, which are more profitable at higher interest rates. Thus, while one might expect a rising-rate cycle to reduce loan demand, it could actually be good news for small- and medium-business loan activity. The historical data in the chart above is supportive of this viewpoint.

Once the rates go up, it will become more profitable for banks to loan money. This will help unlock lending. Banks will soon have more incentive to grant small business funding requests. If things move along as anticipated, interest rates are expected to go up in late summer. This should not surprise anyone, since economists have been pondering for more than a year now when the Fed might raise rates.

If you are a small-business owner looking to borrow money in the next six months, now is the time to start the process. Traditional bank loans, which often have the lowest interest rates, take time to process. Thus, if you are cost-conscious, it would be prudent to get things moving now before the rates rise.

If you have been procrastinating on filing your taxes, get them done. If you haven't met with your accountant, make plans to do it quickly. You will want to file your taxes as early as possible in order to have in place all the financial documents that a lender will require.

Don't just think about this year. If there are successive interest-rate increases, it will impact borrowers, as well as high-cost alternative lenders, who will not be able to hike their cost of capital any higher if they want to stay in business.

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Look down the road. Small-business owners should reevaluate their five-year plan—or start one if they don't have such a plan. If you have been toying with the idea of expanding your company in the next year or so, it might indeed be time to push up the timetable.

—By Rohit Arora, CEO of Biz2Credit; and Venkatesh Bala, chief economist of Biz2Credit