3 Reasons Why Banks Don’t Lend To Small Businesses
These days the newest trend in the market is to create self-sustaining small businesses, but with the influx of a plethora of self-employed entrepreneurs there has come the inevitable pollution of the financial market through the startups that do not come to fruition. They have led many banks to reconsider their policies on lending to small businesses. It may come as a shock to some but banks are actually getting picky and choosy as to whom they are going to loan money to. So, let us see the top reasons as to why banks have stopped lending to small businesses and are now rejecting many loan applications from such businesses.
- More stringent vetting procedures
The vetting procedures in banks are there for a very specific reason. They are there to make sure that the loan is being granted to an individual or a business that can repay the loan with the total interest. On the converse side, the foreclosure is also considered and that too passes through the vetting system as to how much the bank will be able to salvage from the foreclosure. However, with the new stricter vetting procedures more and more new entrepreneurs are falling foul of vetting due to their inability to guarantee repayment. There are also some young business owners who are being rejected only due to the reason that their start up is not worth in actual world as much as it may be worth on the paper.
- Focus on either consumer model or the conglomerate model
Banks constantly try to gain new customers, but they concentrate and focus mainly on two types of customers. Most banks will go for either the big business conglomerates or corporations, or they may go for the large quantity model and appeal to consumers. This creates a certain gap in the dealings where the startups and new businesses just fall through and are, therefore, denied the loans.
- No tendency to support radical ideas
Banks are stable organizations that tend to avoid “thinking outside the box”. They follow a business model which has worked for them in the past and may well continue to work in the future. However, it is the bad luck of many new startups that they fall foul of this inability of the banks to lend to radical new startups. Bottom line is that banks like things to be stable and they do not like to think outside the box when it comes to financing startups that they consider to be based on radical new ideas.