October 31, 2017

Why banks aren’t lending to small businesses

At iCapital, we’re know that even the most successful small businesses need to borrow money at some point. Whether you’re expanding your office space, purchasing more inventory or upgrading equipment, these are all positive signs indicating that your small business is growing. Unfortunately, you often have to borrow money to make money.

Years ago, when you required funds to grow your business, you could head to your local bank to get the loan you required. These days are long gone. Not only are community banks getting eaten up by big banks, but bank lending to small businesses has reached its lowest rate. Here’s why:

The recession is lingering

When small-business lending took a hit during the recession, many believed this was because of the economic downturn, and would eventually recover. Unfortunately, that hasn’t been the case. The total dollar volume of bank loans to small businesses has declined since the start of the recession, and it’s continued to trend downwards.

Regulations are increasing

Since the recession, banks have had to tighten their standards and be extra-cautious about the risk in their portfolios. Since small businesses are inherently riskier than larger conglomerates, banks have to think twice before approving their loans.

Community banks are in a downturn

Historically, small businesses have typically had more success finding a loan at a community bank versus a big bank. But with the number of community on the decline, small businesses are taking a hit. Fewer community banks means there is less opportunity for small-business owners to find a loan at a traditional banking institution.

Banks see little profit on small loans

Often, small-business owners aren’t looking for a large loan. The reality is, it doesn’t make financial sense for banks to provide smaller loans. This is because it costs banks just as much to underwrite a $1 million dollar loan as it does a $100,000 loan. Therefore, they can increase their own profits by focusing on larger loans. After all, banks are businesses, too.

Alternative lending is the answer

Regardless of whether the above reasons resonate with you, we agree that it’s disheartening for small-business owners who have to face this financial rejection. Small-business owners are needing to approach their loan search differently.

Enter: alternative lending. Online lenders have started emerging to help fund small businesses that can’t find funds at the bank. And, given the decline in bank lending to these businesses, the alternative lending industry is indeed growing.

These lenders are typically found online, without storefront locations like a bank, and they tend to offer traditional term loans, invoice financing, short term loans and more.

As a small-business owner, there’s still hope for you and your booming business. As the alternative lending industry continues to mature, online lending could soon become the norm, and equally compete with the big banks.

At iCapital, we’re an alternative lender that keeps the funding process simple and straightforward. We give you the money you need today, and an agreed upon payment is remitted from your bank account until the loan is paid off. And, you can get the money in 24 hours. Same day approval. Next day funding. It's that simple. Contact us today; our team is happy to assist with your business’ unique needs.


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