Business Owners: 5 Truths Your Banker Might Not Want You To Know

Business Owners: 5 Truths Your Banker Might Not Want You To Know
Jackie Lam
on March 15, 2020
Read in 3 min

When looking for banks for small business loans, Bank of America and Wells Fargo may come to mind.

However, big banks aren’t the only choice that could potentially serve your funding needs, especially if you have a small business or a start up.

Funding OptionsAPRDo you qualify?Time in BusinessAnnual Revenue
Funding Option
Lendio Get Started
Starting at 5%
Estimated Apr
Do you qualify?
Time in Business
At least 6 months
Annual Revenue
At least $100K
Funding Option
Kabbage. Learn More
1.5% - 10%
Monthly Fee Rate
Do you qualify?
Time in Business
At least 1 year
Annual Revenue
At least $50,000

Here are 5 crucial details your bank may be leaving out of the conversation:

1. Big Banks Not Lending To Small Business Is Sometimes Intentional

After the financial crisis of 2008, banks are reluctant to loosen loan terms for small businesses, making it harder than ever for small companies to secure financing from traditional financial institutions.

Big Banks May Consider Small Business Loans Too Risky

Because small businesses may be more sensitive to fluctuations in the economy and have fewer assets to provide as collateral, lending to small businesses are seen as risky.

And according to a working paper by the Harvard Business Review, access to bank credit for small business was already in steady decline prior to the Recession.

ROI On Small Business Loans Is Low

What’s more, some lenders see small business loans as just plain unprofitable–

This is a reason why banks don’t lend to small businesses even today.

In fact, the Small Business Association (SBA) estimates that 80 percent of small business loan applications are rejected.

RELATED: Top 7 Reasons Your Bank Won’t Lend You Money

2. Small Business Classification Varies Widely

A small business loan is used to a start or expand a small business, but the definition of what exactly makes a small business small is ambiguous.

For instance, according to the FDIC, a business has a loan balance of $1 million or less is considered a small business, while big banks usually define a small business based on revenue of $20 million or less. 

If a bank is unclear on what exactly constitutes a small business, or if they lump all small businesses together, you have a problem.

It can be hard to serve the financial needs of a mom-and-pop store that only earns a few hundred thousand dollars a year when you’re using the same underwriting criteria as you use for a business that generates, say, 40 to 50 million dollars a year in revenue,.

And in the big banks’ defense, it can be difficult to determine a fair way to assess small businesses across different industries.

3. High Transaction Costs & Search Costs Can Make Small Business Loans Unprofitable

Lest we forget, banks are businesses too.

Search Costs

The search costs are high for both borrowers and lenders:

Lenders may have to spend precious marketing dollars to find qualified borrowers for small business loans, which we already established might be unprofitable investments for them anyway.

Meanwhile, it’s estimated that small business owners spend almost 25 hours on paperwork while applying for a loan at multiple banks.

Platforms like LendGenius are growing in popularity precisely because borrowers can potentially connect with a lender with one easy form.

Transaction Costs

Add to that the fact that transaction costs are the same for small loans as they are for larger ones, and it’s not hard to see why banks may be reluctant to offer loans to small businesses.

4. Big Banks Sometimes Don’t Care For Qualitative Measures of Creditworthiness

When evaluating a loan application by the book, a bank will generally take the 5 C’s of Credit into consideration.

What are The Five Cs of Credit?

The Five Cs of Credit look at:

  • Capital – like a down payment
  • Capacity – like debt-to-income ratio & time in business
  • Collateral – like real estate, equipment, or inventory
  • Conditions – like the current economic climate
  • & Character – like credit reports & personal reputations of upper management

Leveraging your character as a long-time customer at a credit union might earn you some favor, but this ‘soft’ underwriting criteria holds little weight with major banking institutions focused on the bottom line.

So if you’re just starting up with no capital and no collateral to your name, you could have a tough time getting a loan from a big bank. 

5. You Don’t Actually Have to Use Your Bank’s Preferred Merchant Services Provider

While the bank might benefit from referring you to their credit card processing partner, you can actually use any merchant service provider you want.

That means you could compare credit card processors to identify one with the setup, tools, features, and fees that are in step with your business’ needs and budget.

Entrepreneurs: What Have We Learned?

Big banks aren’t out to squash you and your small business, but they’re not particularly invested in you either.

Depending on your business’s needs, you might want to consider another resource. 

The process doesn’t have to mean 25 hours of paperwork–

You can get started with our easy online form.

Jackie Lam Finance Journalist

Jackie Lam is a personal finance writer and and blogs at Cheapsters, which helps freelancers and artists get creative with their money.

Her work has appeared in Investopedia, Business Insider, Huffington Post, and Acorns’ Grow Magazine.

When not writing about money she enjoys roller derby, volunteering, and writing fiction.

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Late Payments Hurt Your Credit Score

Please be aware that missing a payment or making a late payment can negatively impact your credit score. To protect yourself and your credit history, make sure you only accept loan terms that you can afford to repay. If you cannot make a payment on time, you should contact your lenders and lending partners immediately and discuss how to handle late payments.