Top 3 reasons: Why don’t banks lend to small business?

The reasons why banks will not lend to small business

Small businesses have a hard time getting a loan from banks. There are several reasons. The top 3 below.

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1. Banks charge rates too low to take almost any losses

The lowest rates for business loans are at banks, savings and loans, credit unions and the sba.  Because rates are low, the bank will make much less interest income from the loan.    What can you do about it?   Get a business loan that a bank will not approve.   Review more small business loan options here.

2. Federally regulated

Banks are heavily regulated. Through state banking commissions, the federal reserve and fdic, bank’s level of risk in their lending programs is often reviewed and restricted.  As a result, banks put depositor funds at risk if they make loans that are too risky, especially larger commercial loans. If those loans default it could compromise the financial stability the bank and depositor funds.

3. Banks are much more risk adverse

Banks are risk adverse because of the low rates they offer.  So by earning less on each loan, the bank has to have more paying loans to make up for one default.   Banks are also adverse to many other risks, including economic cycles, natural disasters, health pandemics or outbreaks, stock market fluctuations and many more.

What are other reasons banks do not lend to small business? Banks need strong credit, financial statements and good collateral.

Business owners who do not have a high credit score, strong collateral and strong financial statements will probably not be approved at a bank.   As a result, your business needs a lot more funding options.    Apply above.

For instance, other funding options include a bank statement loan and also a loan on equipment.   Both have fast funding and little paperwork.

FAQ frequently asked questions on why don’t banks loan to small business?

Why won’t banks lend to small businesses?

Banks, savings and loans and credit unions only accept the lowest risk businesses because they offer among the lowest rates in small business lending. Their default rate has to be very low so they can only underwrite their low risk customers.

What do banks need to approve a business loan?

Banks look for excellent credit, collateral and the ability to repay. Cash flow as shown through business bank statements, financial statements and tax returns shows a business’s ability to repay. The collateral often needs to be the type a bank will accept and they closely look at the intended use of funds by the business.

My bank turned me down for a business loan. What are my options for business funding?

It depends on your credit, cash flow and collateral. Strong cash flow may qualify you for a business cash advance. If your credit is not good, then your business may need to get an asset based business loan where the collateral is the basis for approval.

My business was declined for insufficient cash flow even though our business has strong sales. Can we get another lender to approve it?

The bank reviewed your business net income after expenses and decided there isn’t enough profit left to pay the new debt. Check your bank statements to see if there are any non business expenses. On financial statements, look for depreciation, amortization and items that can be added back to profit or removed from the statements. Submit this to new lenders when applying or for re-consideration.


Why banks don’t lend to small businesses and how small businesses can get a business loan.

Additional Factors on why banks don’t lend to small business.

Net income for the new payment
Your most recent business net income or bank statements are used to calculate if your business can make the new payment. Not all business loans look at this, but banks do.

2 to 3 year cash flow history.
Traditional banks also ask for business financials including business tax returns for the most number of years, usually 2 or 3 years.

Type of business and industry
Banks consider the industry type in their business loan decision. Banks, savings and loans and credit unions usually prefer certain industry types over others because some industries are considered risky and restricted.

Time in business
Less than 2 or 3 years time in business will often be a decline reason.  New business have a very hard time getting approved.   Check on some limited options for a new business of 1+ month time in business.

Other loans your business already has
If your business has any other loans already, that may be a reason to be denied a business loan by a bank. This is often called over obligated or sufficiently obligated.

Lack of financials such as interim financials
Not having the requesting financial statements can be a decline reason.

Not a homeowner.
If you are a business owners and not a homeowner, some lenders may decline you. Being a renter instead of a homeowner can be a decline reason.   Banks may see renters as less stable and therefore riskier.

Time at current business location
Businesses at their current location for less than 2 years may be denied by banks and other lenders.   Lenders will decline if they feel that stability is lacking.