As more and more banks are consolidating their resources, the criteria they now use to extend business loans are also becoming more stringent. Many large banks are now avoiding what they term as “high-risk” businesses entirely. This means they won’t extend funding to many new entrepreneurial ventures or professional services, such as dentists and lawyers, at all. We discuss that today.
Although the SBA has tried to incentivize these large financial institutions to continue to have a business loan offering in this segment, many have not taken the bait. So who will fund small and micro-sized ventures in the future, as we shift from a country of employees to one of micro-business owners?
Most of the new funding will likely come from one of two places: smaller neighborhood banks and nontraditional lenders. To some, it is surprising that this funding would come from small banks because they are at even more risk than the larger institutions, but there is good reason for this.
In short, large banks can afford to be much pickier than small banks. Often, the appeal of taking on new clients, along with the reduced risk presented by having these loans guaranteed by the government, has become very enticing.
Nontraditional lenders have always been in the business loan game, and they will be even more so in the foreseeable future. This will drive up the average interest rate paid by these businesses. Perhaps with that increase in average rates, the major players will be encouraged to come back into the game to restore balance in these markets. Only time will tell.