5 Reasons Why Banks Don’t Lend to Small Businesses
One of the greatest difficulties small businesses face is acquiring working capital. Inventory, equipment, and employees all need to be paid for, making it a large undertaking to run a successful small business. This is why small business owners rely on loans and other lending services for funding their businesses.
However, it can be very challenging for small businesses to qualify for a bank loan. Here are some of the reasons why:
After the financial crisis of 2007-2008, banks have been more stringent in regards to business lending. Unfortunately, banks view small businesses as much riskier loan prospects than big businesses, which is why small businesses face difficulty in obtaining traditional bank financing.
Type of Business
Startups and sole proprietors are more likely to be denied a loan. Banks may also reject small businesses based on the industry that they are in. For banks, the smaller the business, the bigger the risk is when it comes to lending.
Lack of Business History
Start-ups are more likely to be denied, because banks prefer to see companies with a long and stable business history. Banks also need to see that you have been able to generate some profits over a period of time. Without this proof, your loan application will likely be rejected.
Lending institutions will always want to see your business and personal credit scores. Having good credit scores show your ability to manage finances, pay off debts in time, and avoid bankruptcy. However, a poor credit score indicates that you are unlikely to make sound financial decisions for your business and that is a red flag for banks.
To qualify for a bank loan, you must sufficiently build your business credit.
Lack of Preparation
The bank loan application process is neither simple nor quick. You must be meticulous and have all requisite documents when you are applying for a loan.
Here is are some important documents small businesses should have when applying for a bank loan:
Detailed Business Plan
Personal and Business Credit Reports
Legal Papers (Leases, Contracts, Licenses)
For small businesses, qualifying for a bank loan is difficult. There are a number of requirements and banks will heavily scrutinize your business to determine whether lending to your business falls under the appropriate level of risk.
If you cannot meet these qualifications, it is recommended (even by banks) to seek alternative financing. There are a number of different alternative financing options, from invoice factoring to asset-based lending.
Accel Business Funding has many different funding options for all businesses and funded many businesses for more than $380 million. When banks say NO, we say YES to funding in 24 hours!