Small businesses have a big impact on the British economy. 99% of all businesses in the country are defined as small or medium-sized.
But since the financial collapse in 2008, banks have been increasingly unwilling to lend to businesses like this. That’s a huge problem.
But why have the banks abandoned small businesses? There are five main reasons, and they’re all related:
#1 Smaller loans come with smaller profits
The size of the loans small businesses need is generally quite small in comparison to those needed by large companies. In fact, the average size tends to be around the £30,000 mark.
When you’re a bank handling tens of millions of pounds a day, the profit on a £30k loan probably isn’t going to make much of a difference to you.
For this reason, many banks have chosen to cut their losses and ditch the smaller loans.
#2 Increased regulation for banks
After the financial collapse, regulation throughout the financial services industry was tightened. The Financial Services Authority was abolished and replaced with the more robust Financial Conduct Authority.
Complying with regulation can be very expensive and very time-consuming. This, combined with the low profits on loans for small businesses, means it’s not worth the banks’ while – it’s simply too much effort for too little reward.
#3 Small businesses lack collateral
Almost by definition, small businesses tend to be higher risk. They might not be as established or may not be diversified enough to protect them from market fluctuations.
For this reason, many banks will require businesses to offer assets as collateral – if the business can’t pay the loan back, the bank simply takes the assets.
However, small businesses – especially those in the hospitality sector like restaurants – don’t tend to have many assets. And with homeownership on the decline as well, these businesses are ineligible for a bank loan.
#4 Small businesses tend to have weak cash flows
Cash flow is the measure of the money coming in and coming out of a business. In many regards, it can be considered a company’s heartbeat – an indication of how healthy the business is.
However, smaller businesses tend to have weaker cash flows than larger businesses, particularly if they’re seasonal with big fluctuations in revenue between seasons.
This tends to be a red flag to banks, meaning they’re less likely to approve loans for businesses with lower cash flows.
#5 Small businesses tend to have poor credit histories
A business’s credit score can give lenders an indication of its creditworthiness – with a higher score indicating an increased likelihood that they’ll be able to repay their debts.
But if your business or personal credit score is less-than-perfect, a bank’s unlikely to let you borrow anything, regardless of the overall strength of your business.
A lot of businesses can be excluded based on their credit history simply because they’re newer or haven’t sought credit in the past.
What’s the alternative?
When the banks stopped lending to small businesses, the alternative finance sector was born – and it’s been growing ever since.
Alternative lenders give small business owners access to the capital they need via a range of innovative products, including:
At Boost Capital, our loans differ from traditional banks loan in a number of important ways:
- No security or homeownership needed
- Less than perfect credit history accepted
- Most businesses eligible
- No detailed business plans needed
- Funds in as little as two business days
- Pay back your loan in manageable daily or weekly chunks