Whether or not banks lend money to small businesses has been heavily debated in the last few years, with lawmakers and business owners alike calling on banks to do more to support small business growth and expansion.
Here are eight reasons why banks lend money to small businesses.
Why Banks Lend Money To Small Businesses
1. Small Businesses Are Good Investments
Small businesses have been shown repeatedly to be great investments for banks. According to a 2014 report by SBA.gov, small businesses produce about half of gross domestic product and make up more than 99% of all U.S. employer firms.
The idea is simple: small businesses are more likely than larger companies to offer jobs, less likely to default on loans, and more in need of flexible financing options.
2. Big Business Dominates Small Business Financing
Five years after the passage of Dodd-Frank, the top banks continue to dominate small business lending.
According to data from SBA’s annual financial reports, from 2012 through 2016, community banks made more than $300 billion in loans with a term of three years or less, and credit unions made nearly $40 billion in such loans.
3. Economies of Scale Exist in Banking
Banking is a very competitive industry, and large financial institutions can benefit from economies of scale. They can offer more products and services because more people are working for them.
They can also afford to spend more on technology because their size allows them to spread costs over more customers or assets.
4. Regulators Encourage Bank Lending to SMBs
Regulators want banks to lend money. But it’s not because they want banks to compete with entrepreneurs for funds. It’s because bank lending supports economic growth, and regulators want banks to be strong and stable to continue lending in times of crisis.
5. SBA-Guaranteed Loans Help But Shouldn’t Replace Traditional Bank Lending
SBA business loan interest rates are typically lower than on bank loans, but they vary depending on your business’s credit history. A few factors may affect how much you pay for a loan, including your business’s credit score, size of loan requested, and collateral offered. In addition, some banks have increased lending recently.
6. Technology Simplifies Paperwork and Eases Access to Capital for Startups and Scaleups
It makes sense that banks currently use technology to streamline paperwork and lending processes in an economy as digital as ours.
According to Lantern by SoFi, new technologies like artificial intelligence (AI) and blockchain may soon make it simpler for small-scale businesses to access capital from various sources—including individuals—than ever before.
7. Banks Can Finance All Business Types
The first and most crucial reason banks lend money to small businesses is that banks can finance all types of businesses. Big or small, young or old, businesses have many options for borrowing funds for their operations.
Banks play a critical role in assisting businesses with all types of loans, and they do so at a low rate. However, only one out of every four loan applications actually results in approval.
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Author: Cathy Carter