Why Banks Are Not Lending to Small Businesses

Back in the day you could head down to your local bank and get the funding you need to start or grow your business. Nowadays, it is not so easy to get banks to fund small business or startup businesses. If you are a small business owner and walk into a bank, then you have about an 80 percent chance of being denied. Learn to find out why this is happening and what you can do to get the funding you need.

Why Lending to Small Businesses is Declining

Since the start of the recession, the dollar volume of bank loans to small businesses has declined about 20 percent. The following reasons are why:

  • Increased regulation: banks have had to tighten up their requirements and be even more cautious about the risk in their portfolios. Unfortunately, small businesses are riskier than the larger businesses, which makes banks think twice before approving someone’s application for a loan.
  • Downturn in community banking: small business have had more luck finding a loan at a community bank than a big bank. Community banks have 3 times the approval rates on small business loans than the big banks. Local community banks have 3 times the approval rates on small business loans than the big banks.
  • Less profit on smaller loans: small business owners are looking for smaller loan amounts. There are 80% of small businesses that want loans that are less than $500,000 but it does not make senses for banks to provide these smaller loans. This is because it costs banks just as much to underwrite a million-dollar loan as it does one that is $50,000. Banks can make more money by focusing on larger loans rather than smaller loans.

When you look at the reasons why banks are lending less to small businesses, it does make some sense. However, business owners are often frustrated at this because they face a lot of rejection. One thing a small business owner can do is approach their loan search in a different way. Do not rely on banks to give you the funding you need, you need to be aware of the multiple ways you can fund your business and be open to trying other methods.

Exploring Alternative Lending

Fortunately, there are other options to get funding from such as alternative lenders. Over the past few years, online lenders have started to help fund borrowers when they cannot get the funds needed from a bank. Since many banks will deny small business owners, alternative lending is booming.

Alternative lenders are non-bank lenders. They can be found online since they do not have physical locations like banks. These alternative lenders are offer loans like traditional term loans, invoice financing, short term loans, and much more.

Other ways that you can get money for your startup business include SBA loan guarantees, friends and family, vendor financing, seller financing, and credit card financing. Be careful to not apply to too many loan applications. Some business owners think that they are better off applying to multiple loans at the same time. However, this can be a red flag for business bureaus because this will show up on your credit report. Lenders do not like to see that you have applied to too many places.

The Bottom Line

Do not get discouraged if you apply for funding a bank and get denied. There is hope for you if you apply to online lenders instead. Their underwriting method is smart and online lending could be the future for getting loans. If all else fails cut out what you do not need and keep working on it.