With business financing options changing significantly during the past two years, it is appropriate to review what the “new normal” looks like so that small business owners will be prepared to cope with the challenges they now face with commercial lenders. Business borrowers are more likely to find commercial financing success by quickly accepting the fact that a “new normal” way of doing things has emerged.

The dramatic reduction in the number of commercial lenders that are actively making small business loans is one of the most significant changes in the business finance lending environment. Banks continuing to insist that they are still providing small business financing when in reality they have reduced or eliminated their commercial lending programs is an equally important part of the “new normal”.

A recent report showed that commercial lending activity fell by the biggest amount since records have been kept. This trend seems likely to get worse before it gets better because based on Federal Deposit Insurance Corporation accounting, almost one out of every ten banks is close to failing. The shaky current financial condition of many banks is further documented by reports from the Federal Reserve and United States Treasury Department that over 50 banks did not have sufficient cash flow to make their November 2009 payments for loans made by the Troubled Asset Relief Program (TARP). The payments in question are due quarterly, and over ten banks have missed three consecutive installments. Unlike banks which have tripled and quadrupled interest rates for individual consumers missing a credit card payment, presumably the government regulators are simply hoping to get their money back from the delinquent banks.

Banks have far too often conducted business as if they have a monopoly on their small business financing services. The “new normal” for small business owners should increasingly reflect the growing realization that banks can be replaced when they stop providing an adequate level of service to their business customers.

As a direct result of the continuing shortcomings of banks in providing an adequate amount of small business financing help as noted above, for most business borrowers the “new normal” will involve a new bank or at least a new commercial lender (which might not be a bank at all). Even though banks would like their small business owner customers to keep believing that only a bank like them can help business borrowers, this is truly a myth created by the bankers themselves.

For many essential commercial finance services such as commercial mortgage loans, numerous banks have indicated that they will no longer provide such financing anymore. For specialized business finance services such as working capital management, business consulting and business cash advances, banks only rarely provide a cost-effective and realistic option for commercial borrowers. For business owners which have commercial loans or working capital financing due to be refinanced within the next three years, planning ahead will be increasingly important to the success of their small business financing. With the “new normal”, if commercial borrowers wait until their bank decides to pull the plug on future small business finance programs, the timing is not likely to be as conducive to business refinancing.

An earlier article noted that business financing is effectively on life support based on recent reports of reduced business loans made by banks throughout the country. There are several reasons why intensive care comparisons might help to explain what is wrong with working capital financing and at the same time provide a healthy prognosis for impacted businesses. Because commercial financing is proving to be a serious challenge for most small business owners, this analysis should be reviewed by any borrower about to obtain or refinance commercial loans.

During the past two years, banks have lost much credibility and good will. Until the federal government provided massive bailouts for many of them, most of these lenders were on life support themselves. While some of the banks have recovered, others are effectively still in the intensive care process. But whether we are reviewing the healthy banks or ones still recovering, working capital financing for most small businesses is predominantly in what appears to be long-term intensive care. Banks are generally reducing or eliminating a large portion of their business financing activities, as indicated from most ongoing public and private reports. For example, with little or no advance notice, most banks appear to be closing commercial line of credit programs for small businesses regardless of profitability or length of the lending relationship. This is apparently not a temporary move to the sidelines but rather a permanent reallocation of resources to more profitable activities based on the manner in which this is being accomplished.

Lending activity has also decreased significantly for other forms of business financing such as commercial mortgage loans. Commercial loans have essentially been downsized or laid off just as many workers have. The realization that banks are rarely announcing publicly that these cutbacks have occurred is what makes this situation different. Perhaps bankers like to think that when they stop making small business loans nobody will notice. When it becomes public knowledge that their small business lending window is effectively closed, the bankers who placed commercial financing into intensive care are astute enough to realize that their public image will suffer even further damage.

Before they realize that the business financing world has changed before their eyes, it is possible that small business owners might need to connect several dots. As this article and other reviews indicate, banks are simply no longer providing the commercial loan services that they once did. Commercial borrowers should primarily rely on extensive candid discussions with other small business customers of the bank to confirm whether their bank is one of the few exceptions to this new reality. Even in the rare instances in which banks are truly lending “normally” to small businesses, the prevailing trend of less working capital financing coming from traditional banks should not be ignored.

While business financing patients (commercial borrowers) might be in serious condition when they find that their bank will not provide needed commercial loans, experienced small business finance specialists can frequently help in restoring financial health that will facilitate a business getting out of an intensive care situation. In some cases, this involves finding a healthy bank that is willing (and able) to provide “normal” commercial loans and working capital financing. For successful commercial funding it will be necessary to explore non-bank solutions in many other instances.

There are various ways and sources from which small companies are able to obtain financing but it’s important that you know the steps you need to take and are able to ask the right questions as you move through the process.

1. Look Inward. You need to know exactly what you want and what the benefits are to obtaining someone else’s money. Think about the goals of the company and what you are trying to accomplish and even think in terms of how your business helps your community (what problem do you solve?). If you started out with one location for example and you want to expand to ten then it needs to be clear how you are going to do that and what it will cost to get there.

2. Do not underestimate the amount of money needed. Even if you are still a very small enterprise but have big plans make sure that the amount of money requested is in line with your goals. Do not be shy in this matter because funding sources will not see you as being conservative but rather unrealistic and perhaps a poor manager. Highball the number; just make sure it’s reasonable given your need for capital, your going to need the money anyway.

3. Get Organized. Now that you know what you need the money for and how much you need it’s time to start talking to people that can help. You will want to set an appointment with your accountant and get your financial statements in order. This applies to both your business and personal financial statements. If you have CPA audited financial statements you are ahead of the game and your eventual funding sources will greatly appreciate that level of seriousness and organization. You need your personal financial information prepared as well because you never know what type of documentation a lender or equity investor will require. Side Note: Do not make the mistake of believing that because the money is for your business that there will be no lien requirements on personal assets such as your home.

4. Meet Your Banker. You know what you want, need, and have the information to back it up. Your banker will be pleasantly surprised to see you so prepared and organized. Your first meeting should be exploratory where you discuss your plans and needs and the bank provides some information on their capabilities. They will most likely ask for the last two year end and interim financial statements and possibly tax returns. Give it to them to analyze and come up with ideas. Your banker can be a wealth of knowledge and great contact source for other service providers even for other funding sources since your bank cannot do everything.

5. Small Business Development Centers. If you have Small Business Development Centers in your state they can be a great resource for obtaining contacts and information. In my state, Maryland, we have an excellent center with branches throughout the state. Here you can schedule appointments with a counselor who can help guide you through the process of obtaining capital and answer questions along the way offering advise on various business matters. It has been my experience that these are very experienced and knowledgeable counselors and you should schedule an appointment and go meet with them.

6. Get referrals. Your accountant, banker, business counselor, and other business owners all have contacts that expand beyond the bank when it comes to financing. Yes, even your banker will be happy to provide you with contacts for alternative sources of financing that go beyond the banks abilities or risk parameters. He will do this to keep you happy and coming back to him for all your banking needs. Your accountant is constantly bombarded by third party funding sources seeking referrals so he should be very aware who the various players are that cover your market.

7. Invest Wisely. By now you should have at least one commitment letter on the table that will outline the terms of the deal. If you follow these simple steps the funding process will move quickly and smoothly. Once you do, make sure you leverage those funds for maximum profits so that next time the financing process will be a walk in the park.

Small businesses require some form of capital to get started. Business owners are therefore forced to look for other strategies through which they can finance their ventures. It is worth noting that one source of finance may be better suited for a given enterprise than another, especially considering the repayment plan.

One of the most convenient ways of financing a small enterprise is to use ones own savings. This is because, you will be left to repay yourself at your own convenient schedule and even if the venture happens to fail, then you can just let it go without being harassed from left, right and center to repay that money. You might lose your investment, but nobody will be on your neck.

Government grants and loans are also another source of funds. They are cost effective and reliable. The government has established the Small Business Administration agency that assist small enterprises raise funds with which to set up the ventures. The repayment plans are quite pocket friendly and the interest rates are quite affordable even to the smallest venture in terms of turnover.

Another way to finance your venture is to borrow from private lenders. Although their interest rates may be higher than those of the government, they are less likely to reject your loan application on the basis of your financial background, be it good or bad. If this borrowing fails, or does not play music to your ears, then you can consider financing your venture through partnerships, where you and your partners bring in a given amount into the venture, which will be repaid after your enterprise has realized profits.