The Great Small Business Loan Hype
Private lending continues to grow as banks cannot risk funding the majority of applicants today. With the financial crisis still in the rear view mirror lending institutions are a long way from giving small businesses money. Let’s face it, since 2008 banks are under serious scrutiny and are not allowed to fail. Loans to small businesses without perfect credit are simply not worth the risk. The elite group of small businesses that have perfect credit or collateral behind their applications are the only ones receiving bank funding and any suggestion that bank business loans are available to those outside of this group is false.
The current and very unstable economy has left the majority of small business owners today with credit or collateral issues and ineligible for bank loans. There are many other types of investments that banks can make which carry less risk. However, private lenders can fail because the money is private. Also, the premiums attached to alternative business loans have contributed to an exploding and very aggressive private lending market where almost any type of business owner or credit profile without collateral can get funded. In fact, alternative lending is becoming the primary option for most small businesses today.
A recent article pointed out how more business loans are being given to small business owners. The article gives the idea that these loans are somehow more available to everybody when the truth is that they are not. These misleading statistics are often distributed to garner public favor through media channels in an effort keep the political rhetoric down among politicians that have constituents that own small local businesses. The truth is that although there might be a slight hiccup north for small business lending, it is only for the crème of the crop businesses.
There are myriad reasons why banks should avoid lending to small businesses without pristine credit but the main reason is there are simply many other investments to make that are less risky and compliment their overall profit portfolio. For instance, mortgage loans backed by already significantly reduced prices on homes, “bank qualified bonds” or municipal bonds that do not have tax consequences associated with investing in them, and many other government debt securities are just some investment vehicles more attractive than lending to a small business without supreme credit. A recent article in Forbes confirms that credit is most likely not easing and business loans are generally only available for very healthy businesses.
It is difficult to quantify just how big the alternative industry is getting because private lending companies do not have to report the business loans or merchant cash advances in their portfolio. One indicator of how the industry is growing is the amount of new lending companies that have surfaced over the last 12 months. Although there is no specific corporate filing indicator, any industry insider will tell you that there are hundreds of new companies or ventures blossoming every month. A technology executive at Shield Funding, a respected leader in the alternative financing sector said, “everyday you see more and more companies, names you have never seen before”. What is even more significant to the growth of private business loans is that many of these new lenders are inexperienced in managing portfolios so the appetite to grow is causing extreme aggressiveness and flexibility in lending practices.
It is difficult to quantify the size or availability of existing small business loans today. Banks often obfuscate the statistics to appease local residents and politicians while logic would dictate that they have a very small risk tolerance to lend to any business with less than perfect vitals, a number most likely less than 2 percent of applicants. Alternative or private funding, which the size and availability can only be surmised based on a slew of recent industry entrants, seems to be growing extremely fast. The new lenders, many inexperienced, are likely to favor growth strategies and be increasingly likely to lend risky applicants. Also, there is no public concern if these companies fail so nothing seems to be in the way of the growing availability of funding. If you are a business owner seeking some form of additional funding through small business loans, even if there is not a bank to fund you there is likely a private lender who will.