Getting a bank loan is increasingly becoming a nightmare for most small businesses. A small business often requires funding for operating costs and expansion. Venture capitalists and angel investors may be unavailable. What then does the small business owner do? They approach a big bank but unfortunately get turned away. Why are the big banks still ignoring small businesses?
Low Credit Score
The first thing that a bank looks at when a business or individual approaches them for a loan is the credit score and credit history. Businesses that delay payments to lenders, suppliers and on credit cards issued get a low credit score. This translates as inability of the business to pay back the loan on time if granted.
Lack of valuable Collateral
Collateral is something that can be offered to the bank to hold on to as security in the event of default in repaying the loan. The collateral should be of almost equal value or higher than the amount of the loan. Most people offer their cars or houses or even other businesses as collateral.
Risk of the small business collapsing
Small businesses are at a higher risk of failing compared to big ones. A small business for example a proprietorship or a small partnership is easier to close down id the owner(s) wake up one day and decide to close shop.
Risk of default
A small business is seen as to have higher chances of being unable to pay back the loan and interest accrued.
High interest rates
Due to the high risk incurred by the big banks to fund a small business, they may charge ridiculously high interest rates on the loan. This then becomes unbearable for the business owner to repay, making the bank ignore the small business.
For a small business, the returns may not be enough to cater for operation costs leave alone to pay back the loan. Sometimes the business may even operate on a loss.
Too small a loan
Small businesses often require small loans that they can be able to pay back. These small loans are not as profitable to the bank as the big loans. Big loans offer bigger interest margins.
Confidence and knowing your business is key when you approach a big bank for a loan. A small business owner who knows the numbers and facts about their business is more likely to get the loan.
Yes, big banks are still ignoring small businesses.