Why Banks Don't Lend to Small Businesses

Find out why banks don't lend money to small businesses and what alternative options are available for small business owners.

Why Banks Don't Lend to Small Businesses

After the recession, increased federal regulations have made banks more conservative about the amount of risk in their investment portfolio.


businesses inherently represent more risks than large companies, making banks hesitant to lend them. For traditional lenders, such as banks, the smaller the business, the greater the risk. This also applies to newer companies.

A study by the Federal Reserve website states that only 45% of smaller companies can successfully obtain funding from banks, while larger companies have a success rate of 72%. SMB Compass is a bespoke business finance company that focuses on providing funding and education to small businesses in the United States. Online marketplaces such as Lendio, Biz2Credit and National Business Capital connect thousands of small businesses every month with funding resources based on their needs and demographics. Business financing refers to money borrowed from a bank or investor to finance equipment, products, or services that the company needs to grow.

Business credit is one of the main factors that lenders consider when reviewing a small business loan application. A good credit score is an indication that you can properly manage personal and business finances by paying bills on time and avoiding bankruptcy. If you're a small business owner and you walk into a bank, you have an approximately 80 percent chance of being denied. After the previous recession, banks turned back and are still stricter when it comes to approving commercial loans.

In other words, you must prove to potential lenders that you are financially responsible when applying for a small business loan. Many entrepreneurs think they can go into a bank, apply for a loan and receive funding the same day. In recent years, online lenders have started helping to finance borrowers when they can't get the funds they need from a bank. In the past, you could go to your local bank and get the funds you need to start or grow your business.

However, banks not only approve businesses with a long track record, but they also seek a certain amount of success and credibility that usually comes after years of operation. As a non-profit lender, Pathway Lending offers flexible loans and counseling services to help you achieve the success of your small business. Like banks, alternative lending companies offer loan programs for small business owners who need funding. This makes it essential that you demonstrate to potential lenders the diversity in your customer base, which will help you get the funding you need.