If small businesses are the engines of the world’s major economies, then working capital is the oil that keeps them moving.
Your small business will fail without it.
This is where banks tend to intercede—offering small business loans to pursue your goals. But banks often hinder your progress and make it more difficult for you to grow.
Here are five ways the current banking system is hurting small businesses:
1. Slow loan approval process
Small businesses that want to grow must be nimble. They need access to capital at a moment’s notice to take advantage of new opportunities.
Banks are often the opposite of being able to act quickly. They are bureaucratic entities with endless processes, paperwork, and checks and balances that slow them from approving loans efficiently.
The money you know you’ll need two weeks from now is trapped in red tape that might keep you from that capital far longer than two weeks. You’ll have to find other ways to stay afloat until the bank comes through for you.
Banks also tend to be risk-averse and see small businesses as having high risk, so they’ll move slowly because they relate shrewdness to time.
This keeps funding separate from the people who need it most—small business owners like you.
2. Bank consolidation is resulting in fewer loans
Banks have been merging with the expressed intent to invest in technology and cybersecurity. In 1966 there were nearly 24,000 banks in the U.S. By 2017, there were fewer than 6,000.
That doesn’t bode well for small businesses, according to the Institute for Local Self-Reliance. Bank mergers lead to less available credit and lower rates on deposit accounts, as well as higher prices for consumers.
Small businesses are impacted the most because community banks usually consumed in these mergers often lend the most to SMBs.
When banks merge, it negatively affects small business growth because there are fewer loans allocated to companies of this size.
If small business owners can’t access a loan from banks, they’re more likely to never get off of the ground or, worse, close.
3. Refusing access to capital even when your profile is approval-worthy
If you have a sterling financial profile, you should almost always get approved for a loan, right?
Banks want to take what they see as profitable, risk-averse chances. According to the Harvard Business School, most small businesses are seeking small-dollar loans (under $250,000). These are loans banks would rather avoid.
Even if you have an excellent financial profile, you may still get denied simply because larger loan segments will be far more appealing and profitable to banks.
4. They aren’t invested in your success
Larger banks aren’t nearly as invested in you as local banks are. When it comes to small businesses, community banks tend to be more understanding and offer a more personal approach.
Community banks are more likely to cultivate relationships with small business owners and make decisions that are more informed than larger banks, who are far more invested in their bottom line.
A Harvard Kennedy School study showed that the default rate on family real estate loans at community banks was 3.47% in 2013. For big banks, that rate was 10.42%.
That lends itself to community banks being far more likely to develop solutions to guide you through potential rough patches because they’re more invested in you.
5. Lacking digital solutions
The traditional means of managing finances can be overwhelming for even the best small business owners.
Cutting-edge products for personal banking are everywhere. There are so many easily accessible ways for individuals to transfer funds between accounts and institutions within minutes. Many of these same options do not exist for small business customers.
Banks that offer digital solutions that ease the process and management of bookkeeping for small businesses set themselves apart.
But there are so many banks that don’t offer these kinds of tools, and, in a fast-moving world, it makes running a business that much harder.
If you’re a small business owner who has a good relationship with your bank, consider yourself lucky.
For many business owners, it feels like banks are doing you a favor by even talking to you—and even then they don’t provide the tools you’ve come to expect from your personal banking experience.
The good news is that small businesses are gaining better and better options each day. With fintech companies like C2FO, Stripe, and azlo, you now have funding, payments, and banking partners focused on working with you—not against you.