The smallest businesses in America are often overlooked by big banks when it comes to lending money. These are the main street small businesses of America that include the mom and pop shops and your neighborhood dentists, accountants, and retailers, etc. These are the businesses that create most of the jobs in our economy and employ the most people. Yet and still a big bank (like Chase or Bank of America) will lend to a large company (those with $5+ million) before they lend to a small business – the true driver of economic growth in our society. In fact, according to Biz2Credit’s small business lending index, lending to small business amongst big banks dropped to 18.8% in March from 19.1% in February.
The Problem: High Risk
Small businesses often have much smaller revenues than larger companies and tend to have very little cash reserves in comparison to larger companies. Their cash flow can also be unpredictable, leaving big banks to worry about whether or not they can pay back the funds they borrow. Additionally, underwriting loans for high risk customers such as small businesses can be very expensive for big banks therefore they tend to avoid small businesses altogether. The consensus is that small business cost big banks a lot of money to lend to and the profits they generate (from small business) in comparison are quite small.
The Solution: Microfinancing
Microfinancing has proven to be an effective solution for fighting poverty in third world countries and is slowly gaining traction in the U.S. In fact, microlenders like Accion Texas have awarded microloans to small business owners that were able to sustain their business and hire new employees due to an increase in sales and revenue after receiving a microloan from the lender. According to a recent study conducted by Accion Texas, “U.S. Microfinance: Small Loans, Big Results”:
- 54% of the small business owners who received microloan funding from Accion Texas between 2010 and 2012, we still in business as of May 2012 and were able to hire about 5.6 employees.
- 32% of the small business owners who received microloan funding from Accion Texas between 2010 and 2012, stated that their revenue increased as a result of the funding the received and 41% stated that the increase in revenue met or exceeded their expectations.
- 97% of the small business owners who received microloan funding from Accion Texas were still in business at least one year after receiving the funds.
These statistics are proof that show the undeniable effectiveness microfinancing can have on small business sustainability and growth.
The Conclusion: Seek Microloan Lenders
The bottom line is that small business owners have a better chance of getting approved for a small business loan with a microloan lender than a big bank because microlenders have a vested interest in small business. Microlenders like Accion Texas were created to fill the void that big banks have created in the small business lending arena. If you’re a small business owner in need of capital to start or grow your business, I suggest approaching a microlender before you even think about going to a big bank. Click here to see a list of the SBA certified microlenders in your area.