If you had a decent business idea in early 2007, then you could probably convince a bank to lend you enough money to get started. A year later, though, and few banks would give you a loan even if you had a wonderful business plan that identified opportunities for growth and found ways around the biggest obstacles in your industry.
We all know what happened within that short period of time: the financial collapse.
But the financial collapse doesn’t adequately explain why so many small businesses still find it incredibly difficult to secure funding for responsible business plans. The economy has improved significantly since 2009, when it was officially “in recovery” and no longer in a recession. True, not all Americans have felt those improvements, but plenty of businesses certainly have.
Business Loans Have Not Kept Pace With Financial Recovery
Despite these improvements, the Federal Deposit Insurance Corporation shows that the number of loans under $1 million has fallen by 39 percent since 2007. Ask a bank why, and bank managers will likely tell you that they do lend money to small businesses, but that only a small percentage of those small businesses have enough capital and planning to make the risk worthwhile. In other words, most small businesses are too risky for banks to feel safe.
Are Small Business Loans Too Risky or Not Risky Enough?
Readers who just did a spit-take see the ridiculous unfairness and absurdity in this argument. JPMorgan, the largest bank by assets in the U.S., just lost more than $2 billion in a scheme that smacks of pre-collapse stupidity. And yet small businesses that want to borrow $100,000 are huge risks?
Anyone following the news and questioning answers will likely come to an unfortunate conclusion: small business lending just doesn’t bring in the profits that banks want. Banks would rather make deals that have the potential to earn billions of dollars. Of course, that also means the potential for losing billions of dollars. In other words, small businesses might not get loans because they aren’t risky enough. They don’t deal with enough money, so banks tell them to “move along.”
Getting a Small Business Loan in Today’s Economy
Before the financial meltdown, we had way too much lending. Today, we have too little. There are some organizations, however, that still cater to small businesses. Dealing directly with them could help improve your chances of making a small business dream come true. Credit unions, for instance, have a reputation for investing in small, local businesses that can improve the overall community.
No lender, however, is going to give you a small business loan today if you haven’t prepared. Banks and credit unions really do take risks when they lend money to entrepreneurs. If you don’t have evidence showing that you can make your dream work (not to mention some proof showing that you have enough experience and know how to work well with money), then you can forget about anyone giving you a small business loan out of pure sympathy.
[Photo Credit: Real Estate Carolina Group]