Banks make money by lending to businesses not by saying NO!

The other day, I was reading a post in another website from someone complaining about banks. The writer criticized banks for turning down 99% of the loan requests. In addition, the writer complained that the reasons given by the banks were simply “credit issues”, and that these reasons seemed to be nothing more than a method to deflect blame.

I have to strongly disagree with this evaluation of commercial banks. Somehow a myth has been developed that banks do not want to do loans, and that banks do not want to do small business loans. Nothing is further from the truth. The fact is that most commercial banks need to do loans to make money or they fail. I can tell you from personal experience after working in four different financial institutions, that we love small business borrowers.

First, small business borrowers can be more profitable than large borrowers. In today’s low rate / low loan demand environment, large strong borrowers have most of the leverage on their side. As a result, strong borrowers are squeezing excellent rates, and demanding concessions from the lenders. As a banker, I would much rather have my money working at 8% than at 2.5%.

Second, Quantity has a quality all its own for mitigating risk. If a lender does 100 loans for $100,000 instead of a loan for $10,000,000 to a large borrower, the lender can afford the higher probability of default associated with the smaller less established companies specially if that additional risk is priced into the interest rate that I am charging.

Finally, there is something else to like about small businesses. Most keep a relatively healthy level of deposits, which allows the bank to fund most of their borrowing with their own money.

So why is it that people believe that banks are so unfriendly to Small Businesses?

I have been trying to figure out the reasons why, and I think there are three different reasons. Borrowers either have unreasonable expectations, are not ready to present a reasonable case for funding, or are easily discouraged.

About Unreasonable Expectations.

Entrepreneurs are an optimistic lot, but for lenders a business loan request has to make sense. This means the basics of credit underwriting need to be addressed

Capacity: The ability to repay the loan has to be there, and the lender has to feel comfortable with it.

Capital: The borrower has to bring equity to the table. The lender is a creditor not an investor. Do not expect a lender to have as much risk as the entrepreneur when the lender never gets to participate in the upside.

Collateral: If the business does not work what will be left to repay the loan.

Conditions: The structure has to fit the purpose of the loan.

Character: This covers experience, education, and credit history.

 About Being Ready to Present the Loan Request.

Although it might sound a little harsh, there are a lot of half baked ideas out there. I understand that most entrepreneurs are not financial wizards, but on most cases more attention needs to be paid to the numbers. At the end of the day, the small business owner needs to realize that he might lack the skill and either spend some time reading up on it or get help from people that know.

While you might think the banker that you approach for the loan might be able to help you, the reality is that it is more likely that the banker himself needs some help understanding credit. The truth is that most retail {small business} bankers are more sales people than lenders with credit experience. Furthermore, even if you get a good one his time will be limited due to the pressures of having to book many loans per month or quarter.

About being easily discouraged.

This is the one that really bugs me when I see it. While it is understandable that people dislike rejection, a lot of times people embrace it as an excuse to not even try anymore instead of seeing it as an opportunity to learn and improve your approach for the next time. Just to give you an example of what I usually hear:

I hear a lot of people complain about how their personal credit will stop them from getting a loan. However, the same people have never pulled their own credit report {you can get it for free} and tried to improve their score.

I hear how banks are turning down everybody, but when I ask if they have actually been turned down they talk about a onetime experience or tell me they have never actually approached a bank lender.

Additional Resources

If you are interested in learning more about this subject here is a list of books you can buy in Amazon {I pick inexpensive and usually well reviewed books on the subject}:

- For learning about business plans and building a business: Business Plan: The Step-by-Step Guide to Building a Business

- For learning some small business finance and accounting:
Small Business Financial Management Kit For Dummies

-An overall guide for entrepreneurs with a small chapter on dealing with rejection:The Game Plan For Entrepreneurs

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