Why Bank Lending to Small Business Owners is not Bouncing Back

Nearly a decade after the economic crisis of 2008, you would think that the situation for small business owners would be improving – but you would be wrong. While steps have been taken to try to improve small business lending, the majority of entrepreneurs still struggle to secure the cash they need to start, grow and expand their business venture. In truth, banks have moved from being community-focused to being Fed-focused. Small business lending is simply not a priority.

In general, most small businesses seek loans of less than $100,000. However, bigger loans are more profitable for banks, so they prefer to underwrite larger loans (small loans cost the same to underwrite as large ones). In addition to less small business loans being available, the financial crisis of 2008 also led to tighter credit requirements and heavier terms. As a result, around 80 percent of small business owners who apply for a bank loan are rejected.

According to an independent Harvard Business School working paper, small businesses were hit harder than larger businesses during the 2008 financial crisis. The small business share of total net job losses was 60 percent between 2007 and 2012. While jobs at large companies decreased by 7 percent, jobs fell about 11 percent at small businesses. For the smallest of the small, the situation was even worse. Jobs declined 14.1 percent for small businesses with fewer than 50 employees.

Despite this, small businesses are making a comeback. In fact, they are responsible for creating two out of every three net new jobs in the U.S. Unfortunately, the current lending environment is not very supportive. Large business lending rises, while small business lending continues to fall. Banks today claim they are improving access to their lending for small businesses, but very few small businesses are able to secure a loan.

  • According to the banks, they have trouble finding creditworthy borrowers.
  • Small business lending is riskier than large business lending.
  • Accessing creditworthiness of small businesses is not always a straightforward or a simple process.
  • Small businesses often lack collateral and sufficient operating history.
  • As stated previously, while transaction costs to process a $100,000 loan are comparable to a $1 million loan, it is less profitable for the bank.

Although 48 percent of business owners report a major bank as their primary source of seeking capital, more and more are turning to alternative small business loans from an alternative lender like First American Merchant. The process is not only simple and straightforward, it is also fast. In as little as 24 hours, business owners can secure the cash they need to operate smoothly and grow their business. With a high-risk specialist like FAM, bad credit, limited collateral, business startups, those considered “high-risk” and past bankruptcies are not a problem.

As you search for cash solutions, ask yourself a couple of questions. Which option provides cash quickly and avoids unnecessary costs? Which option will help your business grow and take advantage of opportunities? The key is to find the business funding option that best fits your small business’ needs.

Business Funding expert, Nathan Hale, founded First American Merchant with his eyes set on helping the backbone of our country, small business owners. His passions include writing/producing music, and travel. First American Merchant is America’s Best alternative small business loans company, serving both traditional and high-risk Businesses