As if small businesses haven’t had enough to deal with this year, now there’s something else: traditional bank lending is drying up.
This is according to the latest monthly report from finance company Biz2Credit. The company’s Small Business Lending Index, which analyzes more than 1,000 loan applications from small business owners on its lending platform each month, found that the number of applications approved by banks had dropped significantly.
According to their data, approval percentages for loans from major banks (more than $10 billion in assets) were 13.3% of applications submitted in November 2020. This is down from the approval rate 28.1% recorded in November 2019. Small banks were even worse. They approved 18.3% of applications submitted last month, a number well below the 50.5% approval rate recorded a year ago.
“Even though many businesses are currently operating at a loss and in need of capital, they are discouraged from applying for funding due to the likelihood or rejection as approval rates drop and because there are so many economic uncertainty caused by the coronavirus,” said Rohit, CEO of Biz2Credit. Arora in a report. “Business owners are eagerly awaiting the enactment of a second Paycheck Protection Program (PPP) that would provide repayable loans to survive the current pandemic outbreak. Without significant federal assistance, small businesses across the country will struggle. Many of them will not survive.
Much attention has been paid to the Paycheck Protection Program, which has provided billions in assistance to small businesses through the nation’s network of banks and other government-approved lenders. But the PPP program is administered by the Small Business Administration and the loans are guaranteed by the federal government. Which means that the banks lending this money are taking little or no risk.
Unfortunately, we now find that when it comes to more traditional small business lending, where banks have to bear the risk of non-payment, most lenders seem to have lost their appetite.
Like many businesses, you may have weathered the challenges of the pandemic and this year’s unprecedented economic downturn. Maybe your business finances are strong, you have collateral, and you can prove you can pay off your debt. If so, you have a much better chance of receiving financing from a traditional bank. But for the millions of small businesses whose fortunes have turned otherwise, their prospects have dimmed, even if they are not in a precarious situation but still need financing to grow.
So what to do? Where can these companies seek this funding? Credit cards remain a popular, albeit expensive, choice. Online lenders like Cabbage and On the bridge can provide short-term liquidity, but at very high interest rates. If you are a merchant, you can obtain cash advances from PayPal, Square Where Intuitive. Small business administration Section 7(a) Loan Program is a great choice because the loan requirements are less onerous (the government guarantees these loans through its member banks) and you can get financing for working capital as well as for the purchase of assets. Online marketplaces like Lendio, Biz2Credit and National Business Capital connect thousands of small businesses each month with funding resources based on their needs and demographics. And of course there’s Uncle Steve and Aunt Jane, as long as you’re prepared to put up with awkward family dinners for years to come.
With the exception of the Section 7(a) Loan Program (and your loved ones), all of the above lenders are willing to offer your business financing because they are willing to take on more risk and charge you extra for accommodation. Traditional banks, whether large or small, are not built on this model. They are not risk takers. That doesn’t mean you shouldn’t work hard to build a long-term relationship with your local banker. But these companies want to work with viable, growing, and financially strong customers where they provide capital to grow, not just to survive.