Discover the Real Reason Why Banks Don’t Lend to Small Businesses Anymore

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( — July 24, 2017) — Banks typically have several small business lending products — everything from conventional loans, to inventory financing, to lines of credit, and the list goes on — and they advertise ad nauseum about their “commitment to small business growth” and “being a partner in small business success.”

And so, in light of this, why are banks so reluctant — or in some cases, outright hostile — to small business borrowers? According to National Business Capital, an alternative lending firm that works with many small business owners who are turned down for bank loans, the answer can be captured in one word: profit.

Simply put, it costs banks about as much in administrative and overhead costs to underwrite a $50,000 loan for a small business, as it does a $1 million (or more) loan for a larger organization or enterprise. These costs include assessing collateral, scrutinizing an application, and corresponding with applicants. As such, banks are heading upstream to serve larger clients with deeper pockets. In fact, things have shifted so much since the Great Recession that big banks are approving only about 20 percent of applications — which means 4 out of 5 small business owners are getting a cold shoulder instead of a warm handshake.

Fortunately, as the addage goes, when one door closes another opens — and that’s where alternative lending firms (including the aforementioned National Business Capital) have entered the picture. Collectively, they’re filling the gap by doling out hundreds of millions of dollars a year to small businesses across the country; from relatively new start-ups, to businesses that have been around for decades and are perfectly fine retaining the mantle of “small business” vs. MMO or enterprise. After all, small business certainly doesn’t mean small profit, and many small business owners — including those who work primarily or exclusively from a home office — can earn far more than C-level executives in large corporations.

Of course, to reach that level of prosperity, many small business owners need short or long-term funding; and usually not as a one-time event, but as their business evolves. Many business owners also want a business line of credit that they can tap into at a moment’s notice to cover everything from an inventory shortfall to hiring staff. While it’s not accurate to say that banks have completely shut the funding door — because they do still offer small business lending — the landscape has changed dramatically since the Great Recession; and it looks as though it has changed permanently too. That’s the bad news.

The good news is that alternative lending firms can potentially fill the gap, and keep small businesses on-track for success; and in some cases, survival.