America's traditional bank loans dry up for small businesses – what can they do?

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Small Business Administration’s Section 7(a) loan program is an excellent choice because loan requirements are less onerous

An analysis found that the number of requests approved by banks have been significantly dropping.
An analysis found that the number of requests approved by banks have been significantly dropping. Photograph: Timothy A Clary/AFP via Getty Images
An analysis found that the number of requests approved by banks have been significantly dropping. Photograph: Timothy A Clary/AFP via Getty Images

Last modified on Mon 14 Dec 2020 13.30 EST

As if small firms haven’t had enough to deal with this year, now there’s something else: traditional bank loans are drying up.

That’s according to the latest monthly report from financing firm Biz2Credit. The company’s small business lending index, which analyzes the more than 1,000 loan requests each month from small business owners on its lending platform, found that the number of requests approved by banks have been significantly dropping.

According to their data, loan approval percentages from big banks ($10bn+ in assets) were at 13.3% of applications submitted in November 2020. That’s down from a 28.1% approval rate recorded in November 2019. Smaller banks were even worse. They approved 18.3% of applications submitted this past month, a number much less than the 50.5% approval rate recorded a year ago.

“Even though many companies are operating at a loss right now and need capital, they are discouraged from applying for funding because of the likelihood or rejection as approval rates drop and because there is so much economic uncertainty caused by the coronavirus,” Biz2Credit CEO Rohit Arora in a statement. “Business owners are anxiously awaiting the enactment of a second Paycheck Protection Program (PPP) that would provide forgivable loans to survive the current pandemic surge. Without significant federal assistance, small companies all across the country will struggle. Many of them will not survive.”

There’s been a lot of attention being paid to the Paycheck Protection Program, which has provided billions in aid to small businesses via the country’s network of banks and other government-approved lenders. But the PPP program is administered through the Small Business Administration and the loans are backed by the federal government. Which means that the banks who are lending this money are taking little to no risk.

Unfortunately, now we’re seeing that when it comes to extending more traditional loans to small businesses, where banks must assume the risk of non-payment, most lenders seemed to have lost their appetite.

Maybe – like many businesses – you’ve managed to navigate the hardships of the pandemic and this year’s unprecedented economic downturn. Perhaps your company’s financials are strong, you have collateral and you can prove that you can service your debt. If that’s the case, then you’ve got 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’re not in a precarious situation but still need financing to grow.

So what do to? Where can these companies look for that financing? Credit cards remain a popular, although an expensive choice. Online lenders like Kabbage and OnDeck can provide short term cash albeit at very high interest rates. If you’re a merchant you can get cash advances from PayPal, Square or Intuit. The Small Business Administration’s Section 7(a) loan program is an excellent choice because the loan requirements are less onerous (the government backs these loans through its member banks) and you can get financing for working capital as well as asset purchases. Online marketplaces like Lendio, Biz2Credit and National Business Capital connect thousands of small businesses every month with financing resources based on their needs and demographics. And of course there’s Uncle Steve and Aunt Jane, as long as you’re willing to put up with awkward family dinners for years to come.

With the exception of the Section 7(a) loan program (and your relatives), all of the above lenders are willing to offer your business financing because they’re willing to take on more risk, and charge you extra for the accommodation. Traditional banks, whether big or small, aren’t built on this model. They are not risk takers. That doesn’t mean you shouldn’t be working hard to establish a long term relationship with your local banker. But these firms want to work with viable, growing, financially strong customers where they provide capital to expand, not to just survive.