Why Banks Aren't Making Business Loans and How You Can Change Their Mind
Given all the media attention to the recent plight of small businesses (any business for that matter) in seeking business loans, it is easy to get mad at banks for keeping their vaults closed tight regarding small business lending (a trend expected to continue in 2011). However, regardless of what the media thinks, there are numerous reasons that banks are not lending to small businesses and some of these issues are out of their control.
First, most financial institutions are fearful of current and future government regulations. For example, the credit card reform act of last year has really done nothing to protect consumers from crushing debt. All it has done is make it more burdensome for credit card companies and banks to issue and manage these accounts. In response, banks and other lenders are either passing along these new costs to account holders or telling potential borrowers NO.
Further, with the recent passage of the financial reform bill in 2010, banks and other lenders are sitting tight waiting until all the provisions of the bill are written into law and these organizations have the chance to see how the new bill will affect how they operate their businesses especially in how they underwrite business loans.
Second, while we seem to be getting beyond the housing crisis and all the bad or subprime loans that defaulted in 2009 and 2010, we have yet to see the impact that similar commercial property loans and their impending defaults will have on our lending institutions.
Many banks and other commercial property financiers are still sitting on tons of bad commercial property loans; many that are already in default or approaching it quickly especially since our so called recovery is barely inching forward. Thus, until the banks can get a hold of their commercial loan portfolios, they will continue to hold tight the strings on future lending to small businesses.
business credit cardsLastly, and most importantly, while banks and other lenders continue to see high demand for business loans they are not seeing very qualified borrowers. Many business owners, hit by this recession have, over the past two plus years, seen their revenue and thus net income drop substantially as well as watched their personal and business credit scores crash and burn. At the same time, mostly due to the factors mentioned above, banks have been increasing their lending criteria requiring higher levels of net income or cash flow and higher credit scores.
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