Why don’t banks lend to small business?

Small businesses have a hard time getting a loan from banks.   But why is that?   Why don’t banks lend to small business?   There are several reasons.

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 charge low rates on loans
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.   Apply below.
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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?

So why won’t banks lend to small businesses?

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

What do banks look for to approve a business loan?

Banks look for excellent credit, collateral and the ability to repay. Cash flow as shown through financial statements and tax returns shows a businesses ability to repay. The collateral often needs to be the type of collateral a bank will accept.

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. If your credit is not good, your business may need to get an asset based business loan where the collateral is the basis for approval.

My bank turned my business down for insufficient cash flow even though our business has strong sales. What does that mean?

The bank reviewed your business net income after expenses and decided there isn’t enough income left to pay the new debt. They may have looked at the net income on your bank statements or the cash flow in your business checking account.


Additional Factors on why banks dont lend to small business.

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.
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.
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.