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Willing But Not Always Able: The Latest on Small Business Lending

Posted on by GoingConcern

This story is republished from CFOZone, where you’ll find news, analysis and professional networking tools for finance executives.

We hear a lot from small businesses about how hard it is to get a loan and a lot from bankers that demand from credit-worthy borrowers is down. Now a new study provides insights into the situation, by exploring the top reasons why banks are turning down applicants, along with plenty of other data. And because it includes asset-based lenders and other funding sources, it offers a wider view of just what’s going on in the financing landscape.

The study, from researchers at Pepperdine University, surveyed 1,430 borrowers, lenders and investors, looking at changes over the past six months. Since the most detailed analysis focused on banks and asset-based lenders, here’s a look at the most salient points:


Banks – Demand certainly does seem to be down, judging from responses from the 56 banks studied. About 11 percent reported an increase in applications over the past six months compared to 77.2 percent who had a decrease. But the quality of borrowers is up, according to 55.6 percent of those surveyed. That’s compared to 22 percent who reported a drop. And the number of approvals? That’s gone through the roof. About 76.5 percent reported an increase.
What are the reasons for turning down applicants? Top on the list is quality of cash flow. Almost 25 percent cited that as the reason. And 20.8 percent pointed to quality of earnings.

Asset-based lenders – The 52 asset-based lenders reported the mirror opposite, at least when it comes to demand. Sixty percent had an increase in applications vs. 8.7 percent who experienced a decline. Also while more lenders reported a drop in the credit quality of applicants, a majority saw an increase in the quality of borrowers who were approved.

As you might expect, the top reason for rejecting an application was insufficient collateral (30 percent). “In the weak economic environment, the valuation of collateral is going down,” John Paglia, an associate professor at Pepperdine and author of the study, said to me. Second on the list was quality of earnings (15.8 percent).

What’s it all mean? For one thing, asset-based lenders are attracting more interest from prospective borrowers, but the economy has done a number on their most important criteria, collateral. As for bankers, it seems they’re on the level when they say they want to make loans, but they can’t find suitable prospects.

Apparently when they do get a live one, bankers are more than ready to lend.

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Deciding Between the Cash and Accrual Methods of Accounting

While the IFRS v. U.S. GAAP rages (or stalls) a far simpler (yet no less important) decision with regard to accounting methods is considered by many small businesses every year.

The cash versus accrual decision is one that all businesses have to make but small businesses have to make and depending on an entrepreneur’s familiarity with the issue, this could be a very simple decision or a “HELP!” moment.
, a quick refresher:

Cash – You get cash; you record the transaction. You pay cash, you record the transaction. Simple.

Accrual – This is what your copy of Kieso, Weygandt, & Warfield harped on in college. Accounts receivable, accounts payable, deferrals, revenue is recorded when earned; expenses are recorded when incurred, the matching principle, you know the drill.

Before we get to the pros, let’s consider a simple example. If you and some friends want to pool your money together and buy a piece of commercial property, it doesn’t make a lot of sense to go the accrual route. Your tenants pay rent, you record revenue. You pay for supplies to make improvements, you record the expense. In general, don’t make something complicated that is inherently easy.

However, depending on the entity structure of your business, you may be disqualified from using the cash method. Generally, C Corporations, partnership with one C Corp partner, and tax shelters are not allowed to use the cash method. So if any of these apply, hello accrual.

Enough with the elementary crap though, amiright? Thought so. To get some additional insight, we called on a couple of partners who have no problem sharing their opinions: Scott Heintzelman of McKonly & Asbury in Camp Hill, PA and our own Joe Kristan of Roth & Company, P.C. in Des Moines, IA.

Since Scott is effectively the visitors, he’ll get first at bat. He told us that he encourages clients to adopt accrual right away for three reasons:

1) Fewer surprises. I just met with a prospect and the number 1 frustration they had about [their] prior accountant was that CPA encouraged [c]ash but things fell wrong that next year and they got killed with a tax liability.

2) It helps to prevents “games” being played with year end cash receipts and cash disbursements.

3) It helps the company to think like a “grown up” business. Too often a small business thinks and acts small (cash basis is thinking little) when I encourage them to think bigger.

So, according to Scott, if you’re thinking about getting into business you should think BIG, thus, accrual is the way to go.

Is it that simple? Well, maybe but Joe has some other considerations including – what else – taxes, “For tax, cash is normally preferred because of the ability to control taxable income at year-end. Farmers are notorious for stocking up on feed at year-end to manage taxable income, but being able to manage income by paying off A/P at year end is useful for anybody.”

Of course, the more complex your business gets, the cash method is less available:

Where it becomes a disadvantage is in mixed structures or large entities. If you have related entities doing business with one another, accrual is nice because you eliminate a lot of Sec. 267 related party problems. You don’t have to worry about paying a related party for A/P by year-end to get the deduction because they have to accrue the income.

For a simple structure without a lot of related entities, you will want to do your tax returns on a cash basis. As the structure gets more complicated, accrual method becomes more attractive, and likely mandatory under Sec. 448 or in medium to large entities with inventories.

But for anyone that has to produce GAAP financial statements Joe concedes, “I have no idea why anybody would be cash basis. You can’t be GAAP on a cash basis, and lenders don’t like that.”

The lesson? Like everything in this world, it depends. Do you have a complex entity structure with several related parties engaging in business? Accrual might be better. If you want to be the next Google (or even a fraction of Google), then you might as well be on accrual. If your bank requires GAAP financials to get a loan, you’ll be on accrual.

But on the other hand, if you’ve got no use for GAAP and a simple business not looking to get crazy, the cash method may be the way to go. If you’re still nervous about checking one box or the other, don’t worry, nothing is written in stone. Just consult your business or tax advisor and they’ll help you figure this out. Anyone got more advice? Feel free to chime in.

How Much Can Switching to Cloud Computing Save Your Business? Ask Google’s Cloud Calculator

Still blindly dismissing the benefits of cloud solutions for your small business? Fine. But at least crunch the numbers.

Using the Go Google cloud calculator, any sized business, at any stage in its life can calculate the savings by switching to, in this case, Google Apps:


As you noticed, you can change the assumptions for your own company including the number of employees, your IT Manager’s salary, the size of your employees’ inboxes are and more to calculate not only money saved but time saved. At the end of the little Q&A, you can present your findings to your business partners and employees to evangelize your great idea.

Take a test drive into the cloud [Google Blog]

Small Businesses Need Accounting Help + Accountants Want Opportunities = This Should Be Easy

With all the uncertainty out there, more and more small businesses are cropping up. As anyone who has started their own business knows, there are plenty of decisions to be made, including your accounting method. While that answer may come easy, at some point small business owners have to ask themselves honestly A) Do I know squat about accounting? B) If no, do I hire someone full time or do I contract the work out as needed?


First, if you’re not versed in accounting and taxes are you really going to take the time to learn everything you need to know at the behest of growing and refining your business? Have you seen the tax code? You want to take advantage of everything you can, right? Best to call an expert.

Secondly, if you do decide to get some help, are you willing to pay for someone to keep the books, file tax forms, manage the payroll, etc. etc. full time? Are you going to pay them a salary, benefits, supplement their daycare, give them vacation? If you’ve got the resources to bring someone on, that’s great, start interviewing people. But what if you’re still in the early stages? Finding a CPA firm that can provide those crucial services for you can save a lot of headaches.

On the other hand, if you are already an accountant, maybe this growth in small businesses is your opportunity to get a little entrepreneurial yourself. CPA firms are the most profitable small businesses out there and somebody has to help those business owners keep their debits, credits and tax forms straight; it might as well be you.