Banks are Making it More Difficult for Small Businesses to Get Loans

Untitled-1Small businesses are finding it increasingly difficult to get a loan from one of the big US banks, Wall Street Journal reported. A decade ago, financial assistance for smaller businesses was much easier to obtain while today, companies have to look for alternatives.

The Statistics

In 2006, 10 of the biggest banks in America provided small business loans worth 72.5 billion dollars. In 2014, that figure went down to 44.7 billion dollars. The numbers are expected to be even bleaker by the end of 2015.

Until August 2015, the banks provided 43 percent of the business loans totaling less than one million dollars. In comparison, the figure for 2009 was 58 percent.

This reluctance has enabled another financial players to enter the market and give small companies alternatives. The market share of loan providers that aren’t banks increased to the spectacular 26 percent in comparison to a previous market share of 10 percent.

Why Small Business Loans are Getting More Difficult to Find

According to Wall Street Journal, more and more small businesses are getting rejections because of their inability to meet a bank’s requirements for loan provision.

The borrowing pool has been declining over the past few years. The main reason for the decline was a serious reduction in new company formation. After the financial crisis, banks have also become more reluctant to provide loans to small entities. Larger companies haven’t been hit as hard by the restrictions.

Speaking in financial terms, lending money to small businesses isn’t as profitable as giving a loan to a larger corporation. The loan provision process is as complex, as giving out a larger sum to a bigger company. The return isn’t guaranteed, which is why the gradual shift has been taking place over the past few years.

Many small businesses are thus getting credit cards in an attempt to guarantee some cash. Needless to say, the business expenditure on credit cards is increasing. In 2006, companies spent 230 billion dollars on credit cards. This year, the number is expected to reach 445 billion dollars.

The Alternative?

As already mentioned, small businesses are turning to alternatives and looking for funds from nonbank lenders. Many of these financing opportunities, however, come with interest rates that can be six times higher than what banks charge, International Business Times reported.

Because of their limited access to financial resources, small businesses are finding it very difficult to grow fast. In the long run, this new tendency could contribute to serious economic consequences.

According to the US Small Business Association, small companies are the ones that have 500 employees or fewer. Currently, small businesses create 49.2 percent of the employment options in the private sector. Smaller companies are more capable of adapting to new economy realities, which is why they’re one of the driving forces behind regional development.

In order to stay away from bank loans and very expensive alternatives, many of these smaller and regional businesses are looking for alternatives. The rise of crowdfunding as an option has enabled numerous enterprises to establish their solid operations. Statistics shows that businesses have generated five billion dollars of funding through crowdfunding campaigns in 2014. The growth rate of crowdfunding has reached 74 percent and it’s expected to increase even further in the years to come.

About Joshua Simmons