Why the Big Banks Do Not Want to Fund Your Small Business

James Cummings, the author of numerous books in the management space and Founder and CEO of www.dailyposts.co.uk. If you’d like to submit a guest post to Money Q&A, be sure to check out our guest posting guidelines.

Developing an Effective Financial Plan for Your Business

28 million small businesses in the United States account for 54% of all sales in the country, are responsible for providing 55% of all jobs and 66% of new jobs since the 70s, and have added 8 million new jobs since 1990. With statistics like these, you might wonder why it’s so difficult for small businesses to secure loans from the big banks. Big banks are the preferred source for loans because they can afford to issue loans at lower rates than smaller banks, yet they are more frugal and more protective of their money.

Findings from a survey conducted by the Federal Reserve Banks of Atlanta, Cleveland, New York, and Philadelphia show that only half of the small businesses that requested for business loans in the first half of 2014 were able to get any funding. Ironically, the banks need these small businesses as much as the small businesses need them, especially with the rising trend of online lending. Yet, this does not seem to make much of a difference.

The recession was the worst for small businesses in need of loans and while many expected the tide to change once the recession was over, that hasn’t been the case. In fact, since the beginning of the recession, we have seen a decline of 20% in the total dollar volume of loans from banks to small businesses. What’s more, the figures seem to keep declining even further.

Among the reasons for the reluctance of big banks to provide loans for small businesses is the higher regulatory standards put in place since the recession. Small business loans are riskier and banks would rather be safe than sorry. Also, the collateral requirements of banks aren’t always easy for small businesses to keep up.

Banks make less profit from smaller loans than they do on the bigger ones so they would rather lend a few million to a large business. Whatever the size of the loan, it costs the banks the same amount to underwrite a loan and they consider underwriting smaller loans to be more expensive. Also, when banks notice that a business has a weak cash flow, they’ll rather stay away. Sadly, it is only normal for a fresh start-up to struggle with keeping more money coming in than is going out.

Small businesses with low credit scores or no credit history are likely to have their loan applications rejected but again, it’s hardly realistic to expect small businesses to have developed a decent credit history in the short time they have been up and running. Sometimes, it’s not by any fault of the bank or a failing in the system that some businesses don’t receive the loans they apply for. There are small businesses that will get rejected simply because they were not prepared. They didn’t take the time to prepare a thorough business plan with financial projections or statements, tax returns, bank statements, and personal and business credit reports.

Could things be looking up?

In a report released recently by Biz2Credit, the rates at which big banks are approving loans have reached an all-time high of 24.3 percent, having grown by two-thirds of a percent. According to Biz2Credit’s CEO, Rohit Arora, the recent hikes in interest rates and the Fed’s plans to start unwinding $4.5 trillion in bonds are indicative of a strong economy, and because small business loans are closely linked with prime interest rates, banks will have more incentives to issue loans to small businesses as they’ll be able to make more profit.

Biz2Credit’s survey also shows that the smaller banks more readily make funding available to small businesses. Small banks have been shown to approve 49 percent of all loan applications with many of them offering more SBA-backed loans as these help lower lender risk.

What you can do to increase your chances of getting a business loan

While it may seem that more banks are providing business loans for small businesses, you have to put your back into it and ensure you leave no stone unturned in your efforts to ensure you get that much-needed bank loan.

When you are able to find a lender you know would be more inclined to give you a loan, you would have taken the first step towards securing that elusive business loan. What’s more, you won’t have to work too hard to find the right loan when you use platforms such as LendGenius which will match you with the right loans and help you get funded in no time at all. There are many lending opportunities for getting small business loans if only you know where to look.

As mentioned earlier, banks are less likely to lend to a business with a poor credit history. In a piece for Forbes, Arora points out that banks issue loans with hopes of getting their money back with interest and your business would need to prove it can pay creditors monthly and without hassle. While it may take a considerable amount of time and some serious discipline, it is possible to become creditworthy. You could start by paying off all credit cards with the highest interest charges and switching to a company offering lower rates.

It is important that you prepare all your documentation when you’re applying for a loan. A bank would normally ask you for financial information from the last 2 or 3 years and would be more willing to give you a loan if you prove savvy enough to present all documentation including tax returns, debt-to-equity ratio, and articles of incorporation. The same applies to providing a detailed business plan. Banks want to see a comprehensive business plan including cash flow statements, profit/loss statements, and balance sheets.

There are many other steps you can take to increase your chances of getting a loan but don’t be reluctant to seek out alternative providers of small business loans.

James Cummings is a business psychologist and serial entrepreneur, with over a decade working in finance, IT, marketing and recruitment sectors. He has authored numerous books in the management space and is Founder and CEO of www.dailyposts.co.uk.

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