Do you remember the time when people needed funds to start their businesses, and all they would have to do is get into their cars and go to the closest bank to ask for a loan? You probably know the individual working there personally and that relationship helped support your financial decisions and needs.
However, those days are no longer here. Not only are those small financial institutions eaten up by bigger ones, but, the number of them borrowing money to SMBs is drastically low. For example, if you own a small/medium company, there is a big chance (85%) that your request will be denied in most financial institutions. Yes, it is that high.
If you are interested in why this is happening all over the world, this article might be helpful for you. The text below will feature the most common reasons why both small and large corporations do not lend money to companies all around the world. Now, let’s look at the reasons why this is happening:
Why is it Declining?
During the financial collapse, SMBs took a huge hit, but, most people thought that they were simply victims of the economic downturn, and they also thought that it would get back to the usual state.
However, that did not happen. Instead, the amount of credits given to SMBs (small and medium-sized businesses), has lowered by more than 20 percent – and it is still lowering. And here are the reasons why:
1. The Regulations Are Increased
When the recession ended, banks needed to improve the standards, but, they also needed to be extremely careful about any risks in their documents. Keep in mind that these institutions give credits with everyone’s money, so, that is a pretty good reason why they need to be more careful. Sadly, SMBs are riskier than large corporations, and that is what makes them think carefully and long before granting them any loan.
2. A Decline in Community Banks
When looking at the facts, small and medium-sized companies have been more successful in getting credit from a local bank, than any of the big ones. If you take a look at the numbers, those institutions have three times more approvals for SMBs than larger ones.
However, there is a problem – since the ‘80s, there is a decline in such corporations. And with fewer community ones, there are fewer approvals for SMBs.
3. A Smaller Loan Means Less Profit
Usually, company owners do not seek large loans, in fact, the usual amount is around 45.000 dollars. Also, statistics show that close to 75 percent of SMBs want credits that are higher than 450.000 dollars. But, for the lenders, there is no sense in giving small credit, especially when they look at it from the financial point of view.
However, why does this happen? Well, according to the expert Eyal Nachum and reported by Global Banking and Finance, for the banks, it costs the same to underwrite a 1 million dollar loan, as it would to underwrite 100.000. Meaning that they can earn a lot more money if they focus on giving out bigger loans. And, when you think about it, any bank is a business as well, hence, it is important for them to earn money.
Now, when you take a minute and look at all the reasons above, it kind of makes total sense that banks decided to cut their lending opportunities to small and mid-sized businesses. However, at the same time, it is incredibly difficult for business owners to face this rejection.
This means that small and mid-sized business owners need to think of a different way to search and secure a loan. They should not expect the banks to give them loans – it is all about knowing that there is a wide range of ways to fund businesses and, be prepared to try several, different sources.
Are There Any Other Options?
Now that you know why community and big corporations decide to give fewer loans to people, you might be wondering, what are the alternative sources that can fund your enterprise? Well, one of the alternative options is to look at online lenders. These lenders began emerging over the last few years, and they help company owners – especially the ones that cannot get loans from traditional ones.
Basically, these online lenders are non-bank lenders. As their name implies, they can be found online since they do not have a brick-and-mortar store like traditional banks. There are major corporations such as OnDeck, however, there are also hundreds of smaller ones that are equally as good. The packages they provide include short term loans, traditional term loans, as well as invoice financing.
So, after all, there is still hope for your small or medium-sized business. Since these online “banks” mature and their algorithms for underwriting get improved and smarter, borrowing money from these organizations could easily become a natural thing, and it might also end up competing with small and big banks in the near future.
What to Consider When Opting For An Online Lender?
When opting for an online lender, there are of course some things that you will need to consider. Of course, the first one should always be reading the testimonials of other users. Naturally, you should open the lenders’ websites and read some, if not all, the reviews people left. Besides that, you must check other review websites in order to get the whole picture.
The next thing you might want to consider is the packages they offer. As previously mentioned, there are hundreds of online lenders to choose from, hence, they probably all have different packages and regulations. So, make a list of the ones that are most appealing, and figure out which one might be best for you, and your business needs.
So, there you have it. In a world that is constantly developing, small business owners might have a hard time securing a loan to either start or expand their businesses, however, as you were able to read, there are also alternative options that can help their businesses thrive.
Hence, now that you know what is the reasons banks no longer give loans to SMBs, do not waste any more time and start searching for an alternative lender right away.