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Top 3 reasons: Why Don’t Banks Lend to Small Business?

The reasons why banks will not lend to small business

Small businesses cannot get loans from banks. There are several reasons. The top 3 further below.

Choose from excellent alternative programs here to get approved for funds.
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1. They 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, they make much less interest income.    What can you do about it?   Get working capital that a traditional source will NOT approve.   Review more small business loan options here.

2. Federally regulated

Traditional institutions are also heavily regulated. Through state commissions, the federal reserve and fdic, the level of risk in their lending programs is often reviewed and restricted.  They put depositor funds at risk if they make loans that are too risky, especially larger commercial debt. If those loans default it could compromise the financial stability of the institution and depositor funds.

3. They are much more risk adverse

They are risk adverse because of their low rates.  By earning less on each loan, these lenders have to have more loans paid as agreed to make up for even one default.   Traditional lenders are also adverse to many other risks, including economic cycles, natural disasters, health pandemics or outbreaks, stock market fluctuations and many more.  As a result, there is a long list of why banks don’t approve and close business loans.

What are other reasons banks do not lend to small companies? Borrowers have to have strong credit, financial statements and good collateral to even be considered. 

Company owners who do not have a high credit score, strong collateral,  strong financial statements nor tax returns and will probably not be approved.   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.

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FAQ frequently asked questions:

Why won’t banks lend to small businesses?  Banks, savings and loans and credit unions only accept the lowest risk companies because they offer the lowest rates. Their default rate has to be very low,  so they can only underwrite the lowest risk customers.

What do they need to approve a business loan?

Banks look for excellent credit, collateral and the ability to repay. Cash flow as shown through cash flow statements, financial statements and tax returns verify if the company can repay. The collateral needs to be the type they will accept and they closely look at the intended use of funds.

What are my options after the bank says no?

It depends on your credit, cash flow and collateral. Strong cash flow may qualify you for cash flow funding. If your credit is not good, then your business may need to get asset based funding in which the collateral is the basis for approval.

Will another lender approve us if we have already been declined?

A bank may decline you, but others lenders may offer an approval.  Chances are they reviewed your net income and decided there isn’t enough profit left to make another payment.    Look for lenders that don’t consider net income as closely.

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

Additional Factors: Why banks don’t warm up to small businesses.

Net income for the new payment
Your most recent tax return or bank statements are used to calculate if your company can handle the new payment. Not all lenders look at this, but some do.

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

Industry Type
Banks consider the industry in their commercial loan decisions. They prefer certain industry types over others because some industries are considered risky and restricted.

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

Existing Loans
If your company has other loans now,  that may be a reason to be denied. This is often called over, 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 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
If you have been at your current location for less than 2 years may be denied by many low rate lenders.   Lenders will decline if they feel that stability is lacking.