A working paper from Harvard Business School [PDF] highlights what, on the surface, appears to be good news for borrowers who need large business loans to cover everything from adding new product lines, purchasing new equipment, upgrading and expanding facilities, and the list goes on: apparently, banks have (finally) turned on the large business loan taps.
No, this isn’t because banks are finally heeding the unified call from politicians, boards of trade, chambers of commerce, and business leaders, all of whom have been saying for almost a decade that the post-Great Recession policy among banks to dial back large business loans is not just bad ethics, but it’s very strategy.
Indeed, forcing businesses to cobble together an ad hoc mix of microloans (or try yet another round of “friends and family” financing) in order to get the working capital they need to succeed — or in some cases, survive — isn’t a best practice in any finance or economics white paper. In fact, it’s one of the surest ways to engineer another Great Recession; one that could make the one that erupted in 2007/2008 look like a sneak preview instead of the feature presentation.
Rather, banks are loosening their proverbial purse strings for large business loans because, quite simply, there’s more ROI in it. In fact, it costs banks about the same amount of money to underwrite a $100,000 loan as it does a $3 million dollar loan, but the latter represents significantly more profit. We aren’t just talking double or triple, either. The increase is exponential.
So, in light of this we can return to where we started: this long-overdue policy shift should be good news for businesses that need large business loans, right? Well, not quite.
Yes, this good news for large, established enterprises with plenty of assets (e.g. buildings, equipment, vehicles, inventory, securities, etc.). But no, it’s bad news — make that it’s terrible news — for small and mid-sized businesses, which remain on the outside looking in. Because banks aren’t opening the vault for everyone. Their attention and money is going upstream to big organizations, and away from small and mid-sized firms.
Why is this happening? Again, it makes sense when we continue applying bank-logic: there’s less risk in funding large businesses. For banks, bigger isn’t just more profitable: it’s safer.
Of course, banks can’t and won’t outright launch a marketing campaign advising small and mid-sized businesses to, well, take a hike. Aside from the reputational damage this would inflict, banks make money from small and mid-sized businesses in other ways, whether it’s through credit cards, business bank accounts, payroll services, and so on.
Instead, banks borrow a tactic from the passive aggressive playbook: they don’t tell small and mid-sized businesses to seek their large business loans elsewhere, but they do make the funding process so complex, demanding and time consuming, that very few applications make it to the promised land after several months, and after being “handled” by dozens of different loan officers, administrators, collateral valuation specialists, managers, etc.
Ironically however, the banking world’s unwritten policy to steer large business loans away from small and mid-sized businesses and towards large enterprises has led to something quite positive (score one for the “law of unintended consequences”). That’s because it has created the context for firms in the alternative lending marketplace such as National Business Capital to step forward and close the gap.
Unlike banks, we welcome large business loan applications from borrowers in all sectors and industries — including those that the banking world typically deems too risky to support (such as restaurants).
We also take one day – instead of several months — to assess applications, and since we don’t insist on excellent credit or a long operational history (2-3 months is typically fine), our approval rate is around 90 percent. That’s why when banks repeatedly say no, we regularly say yes.
To learn more about our large business loans and why banks often turn small businesses away, check out our free eBook “How to Get Business Funding When Banks Say ‘No’” today: