Running a small business is often regarded as a challenge and small business loans can help business owners overcome difficulties along the way. But ironically, applying for a business loan is also a challenge in itself. So instead of having a quick infusion of cash to solve your urgent problems, by applying for a loan, you may encounter even more problems than you already have.
So what are the challenges in small business lending?
- Large banks have lousy approval rates. According to the latest figures for small business loans, the approval rate in big banks is only a paltry 4%, even if that rate is still 20% higher than in 2013. That just proves the point that about 80% of small business loan applications are rejected and yet that’s already much better than in the past.
- Small banks are disappearing. Meanwhile, in October 2013 the approval rate for small business loans in smaller banks is at a comparatively healthy 50.2%. While this sounds good, the problem is that smaller banks are disappearing from the financial landscape.
Over the last 20 years, regional and local banks with deeper ties to the community have been taken over by foreign banks and large national banks who don’t actually care as much about the community as for their profit margins.
- Bank loans take up too much time and effort. The entire application process can take weeks, and during that time the business may already be up in flames because of the lack of much needed cash.
According to one study, on average a small business owner needs to approach numerous banks and use up three full days of man-hours to fill out applications, and that’s before they find a bank who will agree to lend them money.
- Banks don’t find small business loans as profitable as larger corporate loans. The banks find these loans much more labor intensive, and that cuts down on their profits. Simply put, a bank usually finds that lending a million dollars is more profitable and easier than lending $50K.
- Banks have rather stringent loan requirements. The US may be past the worst of the recession, but banks have a pretty good memory and they no longer have a taste for risky loans. The problem with small business loans from the banks’ perspective is that these companies are intimately tied to the health of the economy.
A large company can weather a financial storm more easily. But a small business may not be as sturdy, and another financial downturn can cause many small businesses to fold up and unable to pay their debts.
So nowadays, if you need a bank loan you better make sure you have excellent credit, a very stable business, and some collateral for the loan. And you should be able to wait several weeks before you will get your money. That is, if you get your money.
For all these reasons, alternative funding institutions offering factoring services and merchant cash advances have become more viable sources of funding than ever before.