If you’re a small business owner and your bank has turned you down for a loan, don’t feel bad: you have lots of company. While banks are now making more loans of $1 million or over than they did before the Great Recession, the number of smaller loans—to smaller businesses—has dropped significantly.
Why the gloomy picture for small-business loan-seekers? Let’s look at four catalysts:
1. Tight standards and a torrent of regulations
More than 80% of banks say they’ve tightened their lending standards since 2008. To comply with new standards in home-mortgage lending, banks have raised their capital reserves, holding on to more assets and lending out less. Increasing regulatory burdens have also forced banks to hire more employees focused on oversight and enforcement.
2. Risky business
To cope with tighter standards, banks have tried to balance the risk in their investment portfolios. Loans to small businesses are considered riskier than loans to large businesses, because small businesses are typically more susceptible to swings in the economy that can lead to declining sales, weakened collateral value, and growing risk aversion among lenders.
3. Smaller loans mean smaller profits
Studies have found that about 80% of small businesses want loans of less than $500,000. But underwriting a loan of this size costs just as much as underwriting a larger one. To limit time-consuming applications from small businesses, many banks have stopped offering loans below a certain threshold, typically $250,000. As an alternative, banks sometimes refer borrowers to their small-business credit-card products, which earn higher yields, but may also charge higher rates of interest.
4. Community banks are disappearing
Historically, small businesses have had more success finding loans through community banks than through big banks. But since the mid-1980s, the number of community banks in the US has dwindled by half—from more than 14,000 to less than 7,000. As big banks continue to buy up regional and community banks, fewer opportunities remain for small-business owners to find a loan. In a big-bank environment, lending decisions often don’t take into account the mainstays of small-business lending: local conditions and long-standing relationships.
Small businesses have paid a price, then, for troubles plaguing the banking industry. But as bank doors have snapped shut, the doors of non-bank finance firms have remained open. At Advantage Funding, for example, we provide flexible financing solutions that banks cannot, and we’ve been doing it since 1997. Advantage Funding and other non-bank finance firms are here to support you, the small-business owner. We help you grow and thrive in any economy
Contact us today to learn more.