Independent Banker - February 2018 - 58

Lender Life
SMALL-BUSINESS SMARTS
Less-risky business
Eight proven ways to minimize your community bank's small-business loan risk
By William Atkinson
L
oans, by their nature,
represent risk. Smallbusiness
loans in
particular can represent
quite a bit of risk, but
there are several strategies that community
banks can employ to reduce it.
First, though, how are small-business
loans in general faring these days?
According to the Thomson Reuters/
PayNet Small Business Delinquency
Index, small-business loan delinquencies
peaked in early 2009 at 3.4
percent, plummeted to 1.1 percent in
early 2013, but have been slowly climbing
since then, to 1.4 percent in early
2017 (the latest data available).
Defaults are also slowly rising.
According to PayNet's AbsolutePD
Forecast Default Rate Chart, the
default rate for small businesses was
1.5 percent in 2015, rose to 1.8 percent
in 2017, and is forecast to rise to 1.9
percent in 2018.
" Loans to small businesses are
always risky to both the smallbusiness
owner and the bank, " says T.
Alexander Spratt, president and CEO
of Ardmore Banking Advisors, Inc. in
Ardmore, Penn. There are several reasons
for this. Local economic issues,
such as large companies leaving a
community, can hurt small-business
owners' ability to sell services or
goods as people become unemployed.
Furthermore, the increasing presence
of chain stores and online shopping
makes it more diffi cult for local small
businesses to compete.
Industry
VOICE
William Atkinson, a longtime
Independent Banker contributor,
is an Illinois-based journalist
specializing in banking and
small-business issues.
Spratt offers eight things
community banks should
look for to protect themselves
when considering
loans to small businesses.
1. A knowledgeable,
capable owner. Look
for an owner with experience in the
business sector over time, either in
other businesses or in his or her own
business, as well as knowledge of how
to run a business profi tably.
2. Repayment from profi ts. Seek
evidence of the owner's ability to
repay the loan from profi ts, not from
collateral, which is a last resort.
3. Clean credit history. Examine
the owner's credit history
for any signs of sloppiness
or inability to repay debt in a
timely manner.
4. Dedication. Evaluate
the owner's passion in his or
her business, as refl ected in
his or her commitment and
tenacity to get the job done.
58 ICBA Independent Banker February 2018
1.9%
Forecast loan default
rate for small
businesses in 2018
5. A thoughtful
business plan.
Look for a business
plan that matches
reasonable expectations
for revenue,
costs and need for
capital, and includes plans for how to
cope with the unexpected.
6. A comfortable amount of
capital. Too many small businesses
are stretched thin and have no room
for error or support of growth.
7. Collateral. Collateral does
not make a bad loan good, but
it can mitigate a loss by a sale
in liquidation.
8. A personal guarantee. This is
another necessary and secondary
repayment method that helps but
does not always provide repayment
if the company and loan fail. " A
personal guarantee does motivate the
small-business owner to repay the
loan from company revenue, though, "
Spratt says.
Independent Banker - February 2018

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