How Growing Businesses Seeking Working Capital Financing Can Overcome Traditional Banking Challenges

It can be difficult for growing businesses to secure working capital financing from traditional banks. Here’s why and what you can do about it.  

If small and midsize businesses are the engines of the world’s major economies, then working capital is the oil that keeps them moving. Businesses often rely on financing from traditional banks and credit unions to ensure they have the working capital they need to manage cash flow, cover expenses and invest in new opportunities. However, the traditional banking system can make it difficult for small businesses to access financing.

In this post, we’ll highlight some obstacles growing businesses encounter when seeking bank financing and explore key factors business owners should consider when choosing a new bank to work with. Lastly, we’ll explore alternative ways your business can boost working capital and support continued growth without taking on new debt.

Traditional lending considerations for small businesses

As a growing business, one of the biggest obstacles you may face is securing the funding you need. Banks and credit unions are often the first choice for small and midsize businesses. However, there are some potential challenges to be aware of:

Strict approval processes

Traditional lenders often have a rigorous screening process that can involve significant paperwork that delays the release of funds. For a growing business, this can be discouraging, especially when you need to access funding quickly. Banks are also likely to require financial documentation, collateral and a high credit score for approval, which can be challenging for newer businesses to provide.

Fewer loan options

Growing businesses’ revenues and cash flows may fluctuate, which can make it difficult for banks to assess their creditworthiness and offer them a variety of loan options. If banks provide only secured loans or lines of credit, this can be a significant obstacle for businesses that have fewer assets or collateral. Additionally, traditional banks tend to have stricter terms and requirements that may not always align with the needs of a growing company.

Bank consolidation

Over the years, banks have been consolidating, resulting in a significant decrease in the number of financial institutions in the United States. A report from the National Community Reinvestment Coalition suggests that bank mergers lead to less available credit, lower deposit account rates and higher costs for growing businesses. Community banks typically lend the most to small and medium-size businesses, so their absence can hinder small businesses’ growth because there are fewer loans allocated to them.

Risk aversion

Having a good financial profile is not always enough to guarantee loan approval. Traditional banks are inherently risk-averse and tend to favor lending to larger companies with a proven track record of profitability. Small businesses also seek smaller loan amounts, which are less lucrative and therefore less appealing to banks.

Support

Traditional banks typically have a large customer base. As a result, they may not be able to provide personalized service to your business. This can be challenging for smaller businesses that might require more guidance and support as they navigate the loan process. Additionally, the rigid loan terms and repayment schedules of traditional banks may not offer the flexibility that a growing company requires.

Technology

While cutting-edge products for personal banking are everywhere, enabling individuals to easily transfer funds between accounts and institutions within minutes, the same cannot be said of digital solutions for business customers. Also, traditional banks may not offer the same advanced technological capabilities or alternative lending solutions as newer financial institutions and financial technology companies (fintechs). Without access to these digital tools, small business owners can find it difficult to streamline their banking and other financial processes.

Key factors to consider when choosing a bank

If you’re seeking financing or planning to switch to a new banking partner, there are some important factors you should consider to find the best fit for your business. Here are a few questions to ask:

1. Does the bank have experience and expertise in lending to small and midsize businesses?
2. What level of personalized service and support does the bank provide?
3. Does the bank offer flexibility in loan terms and repayment schedules?
4. What digital solutions or capabilities are available?
5. What are the bank’s fees and interest rates?
6. What is the bank’s industry reputation?
7. Does the bank have healthy stability ratios?

Alternative options for increasing working capital without taking on new debt

If your business is growing and you want to increase your working capital so that you can invest in new technology, inventory or equipment, you could consider an alternative to traditional bank financing. An added benefit of these options is that they do not require you to take on extra debt.

For example, a great way to boost working capital is to accelerate customer payments. You can do this by leveraging an early payment program with dynamic discounting — you offer your customers a discount as an incentive for them to pay your invoices sooner. Cash tied up in accounts receivable due to extended invoice terms can have a considerable impact on your working capital. However, an early payment program like C2FO’s can help you free up your outstanding receivables in exchange for a flexible discount.

In summary

Overall, the traditional banking system can present significant challenges for small and midsize businesses looking to access funding, particularly for growing businesses that might require more personalized attention and flexibility. However, there are other solutions that cater specifically to small and medium size businesses. By considering all your options and carefully evaluating the above factors, you can implement a debt-free working capital optimization strategy that aligns with the needs of your growing business.

This article originally published October 2019, and was updated June 2023.