Sep 28, 2022 12:05:13 PM | Are Banks in Favor of Giving Small Business Owners Access to Credit?

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Our local economies rely on small businesses to generate prosperity and promote upward socioeconomic mobility. When small businesses succeed the economy is more competitive, egalitarian, and robust. Small businesses need access to loans to launch, thrive, and extend their operations. Without adequate funding, they may need to suspend operations or even shut down. 

There isn't a formal definition of a small business, however, the U.S. Small Business Administration usually considers companies with less than 500 workers to be in this category. Small businesses account for 99.9 percent of all enterprises in the U.S. and roughly half of all private sector employment. Of those, 98 percent have less than 20 employees or are a sole proprietorship.

These small companies are incredibly diverse. Those in the industrial category produce a huge range of goods and account for around 44 percent of overall private-sector activity. Small businesses are truly embedded into the fabric of their neighborhoods, hiring local residents and backing civic causes.

Entrepreneurs and business owners need access to many types of financing. Short-term credit is important for day-to-day cash flow, whereas longer-term credit is required for capital projects. Nonetheless, less than half of small enterprises say they can’t meet credit requirements.


Why Is Getting a Small Business Loan So Difficult?

Running a small business isn’t easy. Increasingly, entrepreneurs face difficulties that might jeopardize the basic foundation of their businesses, including difficulty obtaining the funding they need to manage and expand their business.

Although there are more funding options than ever for small businesses, business owners are still regularly being turned down for credit lines and loans.

The challenges are partly because banks want to see a five-year record of a thriving business before they provide a loan, and many small businesses are new.

Other challenges small businesses have accessing credit include:

  • Lack of collateral: Collateral is private or business property needed for secured business loans, including many Small Business Administration (SBA) loans, as a payment source in the case a loan defaults. New business owners who don’t yet have corporate infrastructure may have to use their property as collateral, which can be risky.
  • Low credit: Small business owners rely more on their personal credit history to establish their creditworthiness because they haven’t had time to build their business credit. If their personal credit reports have negative items, it will be even more trying  to secure a loan. 
  • High debt or a limited income: In addition to credit, lenders consider your income when determining if you can repay loans. When small businesses are overloaded with costs and have not yet established a consistent income, they may have difficulty demonstrating their ability to repay their loan.
  • Inadequate capital investment: Lenders look favorably on applicants who have invested significant money put in their the companies, but are still able to service their debt. Lenders see insufficient "skin in the game" as a downside for  small business owners who are overly dependent on outside financing and haven’t spent much of their own money on the company.


How to Fund Your Business Without a Bank Loan

Because of these difficulties, small business owners are increasingly looking to secure alternative financing rather than traditional banks in order to keep their doors open. 

Any non-bank lender is considered an alternative lender. Many are accessible online and provide financing to small businesses that conventional banks do not.


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Why Alternative Financing May Be Beneficial for Your Small Business

Small business owners may seek alternate business funding for a variety of reasons, including:

  • Reduced credit requirements: Traditional banks almost always deny loans to clients with credit ratings below usually between 600 and 650.
  • Easier qualification: They don’t satisfy the extra requirements to and receive conventional financing.
  • Faster approval: Some business loan alternatives can provide cash in as little as one week, but standard bank loans can take several weeks for approval.


Alternative Funding Options for Small Businesses

Here are some of the best funding solutions for small and fledgling businesses:

1.    Crowdfunding platforms

Crowdfunding is widely popular with companies in the pilot or startup phase. Borrowers can use a crowdfunding site to raise modest sums of money from a large number of people. The borrower usually establishes a goal and pitches their campaign to attract funders. The advantage of crowdfunding is that it eliminates the application procedure. However, your success ultimately depends on how effectively you sell your cause and how many people want to get behind it.

2.    Marketplace lenders

Marketplace lenders – sometimes peer-to-peer lenders – use technology platforms to bypass banks and connect borrowers directly to financiers. Unlike banks, which provide loans with deposited funds, marketplace lenders bundle loans from investors, give the funds directly to borrowers, and earn money through charges and commissions. Marketplace lenders often borrower's credit score when deciding whether to approve a loan.

3.    Private direct lenders

Direct private lender sdon’t depend on depositors or investors. They lend their own money, which allows them to be more liberal when it comes to approving applications and the amoun they lend. They often provide a variety of loans, including asset-backed loans such as bridge loans. Some provide low-interest loans that small business owners couldn’t get from traditional financial institutions.

4.    Venture capitalists

Venture capitalists (VCs) are independent investors that acquire a stake in a company in exchange for financing. The ownership-to-capital ratios are flexible and typically depend on a company's valuation. This is a fantastic option for companies that don't have tangible collateral to act as a lien for a line of credit. However, it is only a good fit when the business  has high growth potential and some form of competitive advantage, such as a patent or captive consumer.

A VC's advantages are not just financial. A partnership with a VC may give you a wealth of information, industry contacts, and a clear path for your company.

5.    Business Grants

Government agencies at the federal, state and municipal levels offer business grants. Fortunately, they don't demand repayment as loans do.

The most popular approach is to obtain a grant from the government or the Small Business Administration. In addition, the National Association for the Self-Employed offers grants of up to $4,000 for small enterprises.

To succeed, all businesses require operating cash. Startup businesses are likely to fail if they can’t access to proper funding. While it may seem difficult to choose an alternative to a traditional bank loan, there are several small business funding solutions open to entrepreneurs. Gathering the correct market data research and adopting the most suitable financing solution for your company will boost the likelihood of its long-term survival.


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