Why Banks Don’t Lend to Small Businesses

Why Banks Don’t Lend to Small Businesses

Gone are the days when if you needed some capital you could meet with your local banker and gain capital at reasonable interest rates. Today, a small business loan application has an 80% chance of getting denied for bank financing. So what is causing the small business lending decline?

  1. After the recession started, banks had to be extra cautious about their portfolios. Basically the banks were afraid of the economy and how it would affect small businesses. Small businesses are riskier than larger businesses, and in tough economic times it makes more sense for a bank to invest in more sure things.
  2. The loan amounts that are needed by small businesses aren’t really profitable for banks. For example the profit on a $50,000 bank small business loan, may not even pay for underwriting costs for the loan. Also, the way banks operate makes it difficult to service small businesses. It costs the bank the same amount of money to underwrite a $1 million loan than it does for a $50,000 loan.
  3. Community banks used to more prevalent across the country. Historically they would lend money to support local businesses in their areas. Since the 1990’s, community banks have been on a steady decline, being replaced by national chains, whom are notorious for not investing into small businesses.

Small business owners should learn to approach their loan search a bit differently. Talking about a $200k bank loan at 3.5% for an 8 year term for your 2 year old small business that generates $20k per month in revenue is not that realistic these days. We urge clients to explore non-bank lenders in the Alternative Lending industry.

At Cast Capital we lend when banks don’t. To see if your business will qualify for a capital raise, please contact us at 201-515-5563.