Why Banks Are No Longer Lending to Small Businesses

Businesses are turning to the blockchain for lending and financial services. However, banks are moving away from small businesses due to regulations. What makes this a problem is that these companies will be forced out of business as they cannot fulfill their mission without access to banking services

The “why are banks not giving out loans” is a question that has been asked for years. The reason why banks are no longer lending to small businesses is due to the fact that these businesses have less of a chance at succeeding.

Remember when you needed money to start or expand your company and you’d get in your vehicle and go down to the neighborhood bank?

You knew your banker by name, possibly because you shared a class at school or because you bumped into them at your favorite neighborhood restaurant. This personal bond aided in the development of a strong financial relationship; you knew where to go to receive the loan you need.

The days of traveling to your local bank for a business loan, on the other hand, are long gone. Community banks are not only being swallowed up by major banks, but bank lending to small companies is at an all-time low. When you go into a bank as a small company owner, you have an 80% probability of being declined. Yep. That’s correct.

Let’s look at why this reduction in small company bank lending is occurring rather than sitting here drowning in these sad figures.

Why is small company financing declining?

Most people assumed that when small company financing fell during the recession, it was just a result of the downturn and that it would soon recover.

That, however, has not been the case. Since the onset of the crisis, the overall dollar volume of bank loans to small businesses has decreased by 20%. And the downward trend continues. This is why:

  1. Regulation is being tightened. Banks have had to tighten their criteria and be more careful about risk in their portfolios since the crisis. Remember, these loans are being made with mine, your, and your neighbor’s money. As a result, they must use extreme caution. Due to the fact that small firms are intrinsically riskier than their bigger counterparts, banks are hesitant to offer loans to them.
  2. Community banking is experiencing a downturn. Small companies have traditionally had better luck getting a loan from a community bank than from a large bank. In fact, community banks approve three times as many small company loans than major banks. However, since the 1980s, the number of community banks has been dropping, thus affecting America’s job producers. Because there are fewer community banks, company owners have fewer options for getting a loan from a conventional bank.
  3. On lesser loans, there is less profit. Small company entrepreneurs are often asking for lesser credit amounts. In reality, at Fundera, the average loan amount is $40,000. According to other statistics, nearly 80% of small enterprises request loans of less than $500,000. Banks, on the other hand, cannot afford to offer these smaller loans. Why? Banks spend the same amount of money underwriting a $1 million loan as they do a $100,000 one. As a result, concentrating on bigger loans allows them to generate much more money. Banks are companies, too, at the end of the day.

It makes sense when you consider the reasons why banks have reduced lending to small firms. However, it is still aggravating for company owners to have to deal with so much rejection. Small company owners, on the other hand, must learn to approach their loan search in a new way. It’s no longer about relying on banks for loans; it’s about being aware of a variety of funding options and being prepared to test a few of them.

Look at other financing options if you can’t get a bank loan.

But where can you get money if you don’t have access to a bank?

Introduce yourself to “alternative” financing. Online lenders have emerged in recent years to assist borrowers who are unable to get financing through a bank, and the alternative lending sector is flourishing as a result of the fall in bank lending to small companies.

Any non-bank lender is referred to as an alternative lender. Because they don’t have physical locations like banks, these lenders are almost often found online. Hundreds of lesser-known organizations, as well as better-known companies like Lending Club and OnDeck, are among them. Traditional term loans, invoice financing, short-term loans, and other services are available from these alternative lenders.

As you can see, there is reason to be optimistic. As these online lenders grow and their underwriting algorithms become more sophisticated, online lending may become the “standard” and be able to compete on pricing with banks.

Next month, we’ll look at what this new “alternative” lending sector is, what it entails, the benefits and drawbacks, and what it may imply for your company when it needs money.

Have you tried to get a bank loan for your company and been successful? How did it go for you? Tell us about your experience in the comments section.

Do you need assistance in obtaining a loan? Take a look at Bplans’ Loan Finder.

Frequently Asked Questions

Why don t banks lend to small businesses?

A: Banks often have strict lending requirements that can make it difficult for small businesses to secure loans. Also, banks typically charge higher interest rates than the current market rate.

Why are banks hesitant to lend money to entrepreneurs?

A: Banks are hesitant to lend money because they do not want the risk that a loan will go sour. This increases their lending fees, which can be very expensive for entrepreneurs who need loans in order to fund an idea or start up company.

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