Why Big Banks Don’t Do Small Business Lending – Until Now?
Many startups and small businesses are finding it difficult to find lending options when the big banks refuse to lend to small businesses. But why? It used to be far more simpler to find funding and secure a loan for your business before the 2008 recession. The large banks and financial institutions were wary of loosening their terms on lease agreements. Many thought this was a temporary solution; however, the steady decline of small business lending is confirmation that is untrue.
Startups and small businesses are far more likely to be hurt by an economy shift and are likely to not draw in enough profit to be considered “worthy” by the big guys. Did you know the Small Business Association (or SBA) discovered that 80% of small business loans are rejected? That is a ridiculously high and disappointing number.
Many big banks, like Bank of America, have initiated policies announcing their friendliness and willingness to work with small business owners. In 2012, they proposed hiring 1,000 small business bankers specifically for this reason. However, it seems like a resounding “no” is still in the air.
Though the recession began ten years ago, financial institutions still feel the weight of bad credit cycles destroying the books. The economic crisis certainly created more strict regulations in terms of loans, which only increased the big bank standards. Small businesses can be far more riskier than other companies – and they couldn’t measure up in the eyes of big banks.
Small Business – Small Loan
Often, small businesses are not seeking a large loan, which is surprisingly leading to the problem. On average, small businesses are looking for upwards of $250,000. Typically, big banks like funding big loans which drive more profit. It doesn’t make financial sense for them to process tiny loans for definitively “risky” companies, so they are declined. Processing small loans makes for expensive underwriting – a risk the big banks are not willing to take.
Many startups and small business owners are unaware of the difference between personal credit and business credit. Having bad personal credit (when using that for your business) or lack of any business credit is detrimental to your lending options. Banks are more focused on what you can bring to the table – primarily capital (Can you provide a down payment?) and collateral (equipment, valuable assets, inventory, etc.) – and if you have neither? Luck is not on your side.
Community banks have that local feel without the stuffy big bank attitude. They are much more willing to approve small business loans. The decisions for this are often made by people in the community who strive to grow the local economy. However, community banking has drastically declined in the last few years, getting overrun by more Wells Fargo and Bank of America hot spots.
So, is are there alternative funding options for startups and small business owners?
Digital Lending Platforms
The big banks are becoming more and more interested in digital lending platforms. For example, KeyBank acquired the small business lending tool Bolstr this past month, who plans to distribute $2.5 billion dollars in loans in the next 5 years. This automation SaaS tool is allowing KeyBank to streamline the credit process for their small business clients, ultimately creating far more efficiency.
Companies like FaaStrak are creating automated digital lending platforms to drive the cost down in acquiring small business lending. Clearly, the large financial institutions are finally starting to take an interest. Automation creates cost savings and faster underwriting, disassembling some of the big banks largest risks associated with small business lending.
What is FaaStrak?
We have eliminated the typical broker/business model. Our talent, industry knowledge and highly effective process ensures that we transform your lease business into next-generation leasing — putting you light-years ahead of direct lenders and brokers. We have created one smart credit application that connects to all lenders within the marketplace. Users can now build their business around a multi-lender approach and the customer will only have to fill out one application. The coined term “smart application” refers to the platforms ability to update in real time based on the applicant’s criteria. This way the applicant gets sent to the most appropriate lender without being shopped by other lenders.
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