Why Small Businesses are Turned Down for Traditional Loans

As the demand for single-family housing increases throughout most of the U.S., this leads to an increase in other types of real estate investment prospects.

When single-family housing increases, this also creates a demand for industrial, multi-family, office, hotels and retail. In fact, construction and land development loan needs have gone from less than $140 million in 2015 to more than $165 million in 2016. This alone shows the staggering increase how the demand for existing single-family residences have influenced the construction and development markets.

As the housing markets grow, the demand for commercial and small businesses naturally follows. However, some of the biggest name banks in the U.S. are making fewer commercial loans to small businesses. In fact, 10 of the largest U.S. banks only lend $44.7 billion in 2014, which was down from 2006’s peak of about of $72.5 billion. Unfortunately, many of these borrowers are falling into categories where banks would charge them 39-percent, which is completely unaffordable for businesses.

Banks claim that small business loans do not make economic sense, even though companies with fewer than 500 employees account for more than half of the U.S. private sector jobs. Hard money lenders can help provide small businesses with merchant cash advances, which does help to cover some of these costs, especially when banks are unwilling to work with business owners.

An increase in single-family housing also means more grocery stores, pet stores, big box stores, retailers, clothing stores and more mom and pop shops popping up in areas. While most of us think this is excellent for all-around growth, many small businesses end up losing their investments.

The most common reasons why banks do not lend to small business applicants are due to increased regulations. After the 2008 recession hit the country so hard, the government imposed regulation standards, causing banks to be more careful about their investments. Unfortunately, small businesses are far riskier investments than large corporations, which is why fewer banks will offer them terms without collateral.

Physical property is also required as collateral guarantees for business loans. This is why it is so hard for many new businesses and startups to obtain the necessary funding to become successful.

Hard money lenders can also provide commercial property loans, which can be advantageous for businesses looking for the right location. Since hard money loans are only intended for short-term use, this can help companies build up their credit, which can allow them to apply for traditional commercial loans through lenders.

References:
https://research.stlouisfed.org/fred2/series/CLDDCBW027NBOG