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Small Business and Banks, and the Tooth Fairy
By Michael Taylor
When I think about my small business trying to get a loan from a bank, I’m reminded of Randolph and Mortimer Duke from Trading Places torturing Eddie Murphy and Dan Akroyd’s characters for sport. I imagine myself walking empty-handed out of the bank’s thick front doors while cackling bankers slap their knees at the fun of saying no, yet again, to another small business.
When I first started my business a few years ago, I was not quite so jaded. I walked into my first bank with my perfect credit score and considerable personal savings to find out what kind of line of credit I could get. The first banker said I needed two years of business tax returns and a history of profitability in order to get a line of credit.
When I explained that in fact I was just starting the business, so profitable tax returns would not be possible for the moment, but that in fact my perfect credit score and considerable personal savings, not to mention my brilliant small business idea, should qualify me for a loan, I received a blank look in return.
As if speaking to a small, not-so-bright child, the banker leaned forward in her seat and quietly and patiently explained again that I still needed two years of profitability proved by business tax returns. I swallowed my annoyance and thanked her as I left.
Ok fine, I thought, leaving the bank, there’s about a dozen other banks in my neighborhood that would love to have me as a customer. I happen to know there are approximately 8,600 FDIC-insured banks in this country, surely most of them would want to give me a line of credit.
But as the rest of the day led to four more bank rejections for exactly the same reasons, I started to learn some things. I will now share my insight with you:
Banks do not lend to small businesses. Period.
“Now wait a minute,” you say in response to my cynicism, “What about the Federal Government’s Small Business Administration (SBA) that is lined up and ready to support small businesses like mine? I Googled ‘Small Business Loan’ and the SBA shows up immediately, so that should really help, right?”’
Maybe, but I doubt it. The SBA will also require at least 2 years of financial statements, and really can’t be bothered on loans less than.$150,000. In fact, the program is really designed for large loans up to $2 million.
In addition, although your small business might qualify for an SBA-subsidized loan, the nature of the program actually proves my point that banks do not want to lend to small businesses. Behind the SBA program is a government guaranty to the bank to reimburse it for 75% of the value of the loan in case of a loss. In essence, the government has to bribe banks to lend to small businesses. Without that bribe, er, guaranty, banks won’t do it.
I’m sorry to break it to you this way about banks, and there really is no tooth fairy. I ask any reader out there to write to me and tell me differently. Also, please send me a line of credit application from your bank.
Coming NEXT: “What do banks do?”
Comments (2)October 12, 2007 10:35 AM
Comments (2)
You're right about the downsides of banks not lending to small businesses. But sometimes this can be a blessing. For example, knowing that banks aren't an alternative forces an entrepreneur to look elsewhere. And that can open doors to better deals than the bank would give us anyway! More flexibilty and more risk sharing. I've started 6 businesses over the last 35 years and never had a bank loan to help start any of them. The list of ways to find money is long: 2nd mortgages, credit cards, borrow from pensions or take on silent or active partners. And if you're in a service business that doesn't require much capital you may find you don't need money from anyone other than your customers! Joe Phelps
Posted by Joe Phelps | October 27, 2007 7:22 PM
Posted on October 27, 2007 19:22
I agree there can be a silver lining to the limitations of banks, and in fact part of my business is built on the idea that there are non-bank financial niches as a result. But I do find the bank 'come-on' to small businesses to be disappointing at least and misleading at worst. And its a bit of a shock to the new entrepreneur who walks into a bank branch and might think she'll actually be able to get a loan...
Posted by Michael Taylor | October 29, 2007 3:09 PM
Posted on October 29, 2007 15:09