In February 2014, Bloomberg published an article with the blunt title of “Funding a New Small Business? Don’t Bother with Banks.” On the surface, that title might have seemed a bit reductive. After all, there are surely some scenarios where a small business could go through a traditional bank for financing and have a positive experience, right?
However, reading through the article made it clear that the reasoning behind the title was sound. As writer Karen Klein noted, “getting a small business bank loan is never easy, and it’s been especially difficult since the financial crash of 2008 and the lingering credit crunch.” She concluded that, while banks are starting to loosen the purse strings slightly as the economy continues to recover, most small businesses will still never see a dime from banks.
The Flaw of Bank Loans for Small Businesses
Klein’s article sends a clear message: if you are the owner and manager of a small business, and you need financing, there’s a very substantial chance that a traditional bank loan is not the correct option for you. The biggest reason for this statement is that applying for a small business loan from a bank is probably a waste of time. There are any number of reasons that a bank could reject your loan application, from bad credit to insufficient collateral to inconsistent cash flow. If you’ve been in business for less than two years, you can also forget about a loan: you don’t have the track record to show a bank that you are “good for the money.”
The bottom line is that banks aren’t willing to take a risk on most small businesses these days. Banks want to get their money back in full, plus interest, for every loan they approve. If for whatever reason they think that your business might not be able to turn around and pay back the loan, then they won’t give you one. Even if your revenues are good, and you are showing growth, a bank still might reject your loan for external reasons, like downward trends in your industry as a whole.
Such is the flaw of bank loans for small businesses. By definition, your business is not large enough to carry the clout and assurance that banks want to see. The insulting part of this equation is that, if you had the clout, experience, earnings, and established business base that banks want, you wouldn’t need to ask for a loan.
How Applying for Bank Loans Could Hurt Your Business
Going into a search for financing with the belief that you won’t qualify for a traditional bank loan might seem defeatist, but it can save your business a lot of grief. For one thing, as we mentioned above, applying for a bank loan can be a waste of your time if your business isn’t already a strong candidate for bank financing. As an entrepreneur and small business owner, you are probably already working more than the usual 9-to-5, 40-hour workweek. The time you would spend applying for loans or dealing with unhelpful bank representatives would be more effectively focused on other facets of running your business.
The other thing that many business owners fail to realize is that, by applying for loans that you have very little chance of getting, you are actively hurting your business’s credit. If you go to one bank, apply for a loan, and get rejected, that information will be relayed in future credit reports. Should you apply for another loan through a different bank, they will see that you have been rejected elsewhere, and your chances of approval will dwindle even further. At the very least, ask your bank for the specific requirements they have for businesses that are seeking to finance. Ideally, you will be able to get a sense of what the bank is looking for regarding business track record, cash flow figures, credit score, and collateral before you apply.
If you read the requirements for several banks and can’t meet them, don’t try. You aren’t applying for a job, where employers might overlook the qualifications you don’t meet if you impress them in other ways. Banks are very unlikely to budge on their loan requirements for small business loans, and you will do more harm than good by trying to be the exception. Instead, look for alternative solutions for small business financing. At Mulligan Funding, we offer options like working capital loans, merchant cash advances, and business lines of credit—all of which offer higher approval rates and quicker disbursement of funds than traditional bank loans.
