If you’re looking for a place to park your retirement savings, want to buy some travel insurance, or just want a shiny new fridge magnet or nice wall calendar with pretty pictures, then heading to your local bank is going to be a rewarding journey. Heck, you might even get a free pen.
However, if your trying to get working capital for your small business, then instead of a warm handshake (or an energizing fist bump), your bank might give you the cold shoulder. What’s the deal?
It’s like this: in the aftermath of the Great Recession that erupted in 2007/2008, across-the-board banks have dramatically dialed back their small business lending. In fact, big banks typically approve only 10-20 percent of small business loan applications. Smaller banks and credit unions don’t do much better, and certainly haven’t returned to their pre-Great Recession lending levels.
On the surface, banks say that this due to tighter regulations. In other words, they’d love to open the small business funding taps, but well, you know how compliant-obsessed Uncle Sam and his relatives at the state level are these days.
But the real story is rather different: banks make much more profit heading upstream and targeting larger businesses and enterprises. After all, it costs about the same for banks to underwrite a $100,000 loan as it does a $2 million loan, although the profit margin on the latter is far greater.
And as for taking on excess risk by lending more, that too is not a concern for banks, because all loans are secured by collateral. No, they don’t want clients to default and force them to liquidate assets. But if it happens, then be assured that banks won’t be in the red. When the dust settles and the numbers are crunched, banks will come out ahead, even it takes them longer than planned.
Now, the purpose of this article isn’t to criticize banks for what basically amounts to some pretty lousy policies; especially since they tend to preach in their marketing about how much they “support small businesses.” Rather, the above is to help you understand why banks make it so difficult for small businesses to get a loan (e.g. demanding exceptional personal and business credit scores, at least two years of verifiable business history, comprehensive business plans, tax returns, resumes…and the list goes on).
So that’s the bad news. But it’s not the full story, because as the saying goes, when a door closes a window opens: and that window is called alternative financing.
Alternative financing is simply the catch-all term for a marketplace in which private firms collectively lend billions of dollars a year to small businesses across the country, including those that have only been around for a few months, and whose owner has dented, dinged or just plain bad credit. Even a past discharged bankruptcy or current open tax lien typically aren’t deal breakers, and loans usually take a matter of days to get processed vs. months at banks.
The moral to this story? Banks have their purpose. But generally speaking, lending to small businesses is no longer part of their mandate, and there’s no sign that will change soon (despite the fact that the economy has been expanding for almost 10 years in a row!). As such, if your bank says no to your loan application, then before you throw in the towel and give up your dream of being a business owner, explore what the alternative financing world has to offer. There’s a good chance that you’ll be pleasantly surprised.