It's Not You, It's Them: Why the Banks Aren't Funding Small Businesses


You start your day excited, put on your favorite outfit and think “this is finally the one!”  You walk up to the front door hoping this first meeting will lead to a profitable relationship.  But once again, you get rejected.  You’re crushed, wondering, “Is it the way I look? The way I talk?”  You’ve been on one too many hot dates – with the bank.

You might be feeling discouraged after so many rejections from banks.  We’re here to tell you that it’s not you, it’s them.  Well, you have had something to do with it, but let’s focus on why the banks are moving away from funding your business:

1.     Facility Size

Bank costs are increasing, between the cost of overhead, managing regulation, and KYC (know your customer) policies.  Managing small loans costs the banks as much as managing larger loans with these logistical costs, but the cost of financing at the banks for a customer remains low.  While the bank won’t confess it explicitly, they are moving towards doing larger deals in order to make the numbers work for them.

2.     Regulation

The rules and regulations on what loans are acceptable for bank funding change every day.  It is both expensive and stressful to have a loan that is out of compliance, or to explain a bank’s decision to keep a ‘riskier’ loan on their books.  Therefore, banks have a tendency to politely ask you to leave or to not renew the line, in favor of loans that follow their strict compliance rules.

3.     Risk Tolerance

It used to be that banks could account for a certain amount of risk when considering a loan. That is more or less non-existent today.  Banks have different groups that are supposed to consider cash flow, or asset value.  However, the risk tolerance is gone and the banks are not able to partner like they used to.  Any historical losses or collateral (like foreign receivables) make them uncomfortable, and veers them towards risk-free businesses.

Don’t be deterred by big banks’ strict rules and aversion to less-than-perfect businesses. There are still groups out there that are looking to partner with great businesses.  These groups leverage technology to allow them to focus on smaller businesses with a higher risk tolerance.

There is a solution to this rejection and it’s important to keep the following advice in mind when reaching out to lenders:

Do your research - Ask a lender about their sweet spot, preferred collateral, typical loan size, and usual covenants or restrictions.

Don't be afraid to tell them the whole story - better to get the entire story out there and see if they can live with the reality of the situation rather than find out after you've been down the path with that lender.

Make sure they're listening - Is your prospective bank or lender asking the right questions?  Do they understand the business difficulties?  Make sure you're partnering with someone that gets you.

Accept that some will just be out of your league . . . and that's OK.  Know where your business is today and where you expect it to be in a few years.  Make sure you were with a lender who is aligned to execute on your near term and long term goals.

Dwight Funding