All small business owners should read this article!
The international banking meltdown of 2008 was unlike any economic downturn in the past 100 years. Forced to comply with changes made in the banking system, banks no longer have reason to make loans to small businesses. As part of a general planning strategy, every business owner must understand the following five reasons most banks will not loan money to a small business.
Why The Banks Aren’t Lending To Small Businesses
Reason #1 – Too Big To Fail. The great recession of 2008 actually threatened the survival of all US banks. To keep the international banking system working, bankers and politicians coined the phrase “too big to fail” as a way to justify the greatest financial bailout in history. As billions in newly-printed money flowed into the vaults of the world’s largest banks, smaller banks were left to fend for themselves. This immediately gave big banks a huge competitive advantage that continues eight years after the financial system meltdown.
Reason #2 – New Banking Regulations. To deal with the sub-prime mortgage loan abuses that triggered the great recession, treasury regulators around the world have imposed a complicated program of strict new banking regulations for what loans can be issued and the credit rating requirements for all borrowers. Additionally, banks are required to maintain higher reserves and comply with very burdensome record-keeping and reporting requirements. Only the biggest banks can comply with these new lending requirements.
Reason #3 – Negative Credit Events. From 2008 to 2013, over seventy-five percent of all small business owners in the United States experienced at least one negative event that significantly lowered their business and/or personal credit ratings. These negative events include late payments, credit card charge offs, loan delinquencies, home short sales and foreclosures and bankruptcies. Because big banks do not want to give loans to small businesses, they use these negative events to reject over 80% of all loan applications from small business owners.
Reason #4 – Lower Interest Rates. As a direct result of the economic downturn and with the goal of rebuilding the US economy, the Federal Reserve has kept a very tight lid on interest rates. Big banks can make more money loaning to each other than to small companies. Because of this consistent policy of low interest rates and since only so much money available to lend, there is no incentive for big banks to make loans to small and medium-sized businesses. While current loans to small business have decreased by 30%, loans to big business continues at the same rate as before the recession.
Reason #5 – The Risk / Reward Ratio. Big banks make more money on loans to each other and their big business clients than on loans to small companies. Although small companies make up the majority of businesses in the United States and account for most new jobs, loans to small businesses have a greater risk and offer a lower financial reward than a loan to a big business. Until this risk / reward ratio changes, small business owners will continue to find it very difficult to get a bank loan.
No one can predict when banks will loan to small companies again. Until they do, owners of a small business that cannot get bank financing are advised to look into the benefits of asset-based lending programs offered by Diversified Business Resources, Inc. For more information, please contact DBR’s COO, Ben Gage, by email at Ben(at)dbrfactors.com or by phone at (760) 738-1400.