Everyone naturally wants to feel their patronage is valued and welcomed when they do business with a firm. Grocery shoppers want to be appreciated when they check out; drivers want to be gratefully acknowledged when they have their car serviced at the shop, and so on. Businesses feel the same way when they conduct business with each other.
Small businesses have been feeling underappreciated as of late. Not by their customers. Not by the government’s Small Business Administration. Not even by the news media. No, they’re feeling that they are not getting the welcome and the services they feel that they are due from the firms and institutions they rely upon to grow and expand. They feel they’re being ignored by banks, especially by big banks.
It’s been shown time and again that small business is the real engine that drives the American economy. Small businesses combined generate more revenue and employ more people than big business. Yet when an individual small business owner goes into a big bank to ask for a loan or for financial assistance, it seems many walk away with frustration and anger rather than with money or help.
Are big banks giving small businesses service… or the cold shoulder?
First, here are some numbers. Small businesses are investing to meet growing demand for their products and services in a strong economy. Borrowing by these companies has reached recent highs. Big banks report they have loaned record amounts to small businesses, continuing a trend since the end of the last recession. Forbes has even run a helpful article identifying the top 10 big banks loaning the most to small business. So everything is fine and dandy, right? Yet horror stories still abound about how big banks seemingly give small businesses the back of their hands on a regular basis.
Both scenarios can’t be true. It can’t be a boom time for big bank small business loans yet in the same instance be a time when small businesses bewail about bad treatment at the hand of big banks. But that seems to be the case.
Rather than provide anecdotal stories that reflect individual experiences, let’s look at some firm reasons why a small business owner may not get what he or she wants at a big bank. In other words, why might you be turned down for a loan even though, according to published reports, big banks are loaning more than ever to small business.
Credit Score/Credit History – Credit score and past credit history are the first thing banks look at. If your score is too low or your history reflects a slowness to pay, this will put any potential loan in jeopardy from the start.
Little or No Collateral – No matter if a bank is big or small, it’s not extending a loan for its health. It expects something in return, preferably more money coming back in than it lent out. If it can’t be repaid, then it expects some type of collateral it can take instead to settle the loan. If you can’t offer collateral to secure a loan or what you have to offer isn’t worth much, your chances for a loan are greatly diminished.
Risk – Nothing lasts forever. But a small business may not even last a year. That means a big bank loan to a small business involves increased risk, and risk is something banks are quite averse to. They prefer a sure bet. If they do not view your small business as a sure bet but rather a risky proposition, your chances at a loan start to quickly dwindle.
Interest Rates – You can’t get something for nothing. A bank may charge a higher interest rate to recoup a riskier loan. Of course, that higher interest rate may, in turn, make it harder for the borrower to repay, causing either the small business or the bank to walk away.
Not Enough Return – Related to the above. A bank is a business like any other. They have owners and stockholders who expect to turn a profit. A small business loan, even at a high interest rate, may not provide enough return (profit) to cover its costs to the bank. In that case, the bank may figure, “Why bother?”
You – It’s not personal. But you may not have made a good enough presentation, provided enough information or just not been convincing or confident enough to overcome the bank’s reluctance to engage in what it views as a risky activity.
So what can you do when you walk into a big bank looking for a loan and encounter each of these points? It’s on your shoulders to address each of them and to show the bank you have a sound and workable business plan, that your plan will result in a strong and growing business that will be able to satisfy its customers, pay its employees and vendors, and repay the bank in a reasonable period of time at a minimal cost to the bank.
Of course, unless you’ve come up with a product or service that sells itself – like a cure for baldness or a way to turn straw into gold – that’s often easier said than done. No one ever said running a small business was a cakewalk… not even a baker.
There are alternative methods of small business funding if you do not wish to engage with a big bank or already have done so and have been turned down. However, some of these alternative sources often have hidden or high costs associated with them that may make using such a source may expensive or more trouble than it’s worth. Read more about the dangers and risks of alternative small business funding in one of our previous blog posts, “Online Small Business Loans/Cash Advances – Fast Money, But Often with a High Price.”
There is another funding option small business owners may want to consider. If a bank doesn’t seem to want your business or to help, you may want to take a closer look at invoice factoring. What is invoice factoring and what makes it a great option for small businesses?
Basically, invoice factoring is a time-tested and proven way for a small business to get immediate funding on its outstanding customer invoices. For example, you may have a slow-pay customer who takes 60 to 90 days or more to settle an invoice for products or services rendered. This delay can cause a small struggling business many hardships as it awaits payment. By employing an invoice factoring company, the small business can receive immediate funding for all its outstanding invoices. Rather than waiting to collect payment from its customers, the small business can put that money to work straight away, either to grow, pay current workers, hire more workers, or settle invoices of its own. In turn, the customer sends invoice payments to the factoring company in the normal course of business.
Charter Capital USA has been providing fast, efficient invoice factoring services for more than 20 years. Our company understands the funding challenge small business owners face. We have the experience and know how to help small businesses overcome those financial challenges and improve cash flow. We are a partner you can trust. To learn more, call toll-free at 1-877-960-1818 or email us today at [email protected].
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