Money management

Why improving access to credit is crucial for small business

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Whether we’re talking about a mom and pop deli, local laundromat, or handy hardware store, small businesses are the lifeblood of America. They provide jobs, opportunity, security, and healthcare to millions. According to the U.S. Chamber of Commerce, as of September 2021, 31.7 million small businesses in America account for 99.9% of all companies. 

Even though small businesses are crucial to the economy’s overall health, they have a hard time getting the financing and lending they need from traditional banks. In fact, more than 27% of businesses claim they cannot receive the funding they need. This lack of capital can prevent them from growing, hiring more people, improving their product, and getting off the ground.  

The inability to get loans has also made it so the amount of startups has declined since the 80s. In 1980, new companies in their first year accounted for 13% of businesses. Now, that number hovers around 8%. 

For small businesses in the U.S. to flourish, they need the proper funding that Fortune 500s get so easily from traditional banks. Since 2008, big businesses have been fortunate to experience a 35% increase in bank lending, whereas small businesses have faced a 15% decrease. 

Why do small businesses have a hard time getting big bank loans?

For any small business to thrive, they need access to funds with the lowest interest rates. These usually tend to be big bank loans; however, in order for any company to receive them, they need to meet the stringent guidelines to qualify. 

These guidelines are known as the five C’s:

  1. Character – Business credit score
  2. Capital – Owner’s/Stakeholder’s investment
  3. Capacity – Cash flow 
  4. Conditions – Current economic state 
  5. Collateral – Assets

Unfortunately, many small businesses tend to score low in these areas simply because they are new to the game. 

According to the 2015 Small Business Credit Survey, the main reason that small businesses are turned down for credit is the lack of credit history. But then, how can you possibly have a credit history with a business you just started? While it is possible for small businesses at every stage to start building strong business credit, not all business owners know how to go about this. For those who aren’t as well versed in understanding their business credit score or who don’t have the most impressive history, it can feel like they’ve been set up for failure before they are even given a fair chance to succeed. 

The second reason that small businesses have a hard time receiving credit is that they often lack the required collateral—e.g., property, equipment, or other assets. This is usually because the business owners are just starting out and have not made enough profit to invest in assets or property.  

To make things even worse, traditional banks usually take a long time to review small business applications and approve or reject them. This slow process can prevent businesses from having the money they need when they need it. 

Online lending has become a viable option

While many large financial institutions have not been able to give small businesses the funding they need to grow and scale their businesses, online lenders have been able to come in and provide streamlined support in owners’ time of need. 

Many online lending companies offer a quick application and funding process. Sometimes they wire your loan in as little as 24 hours and do not require a hard inquiry on credit reports. They also tend to be more open to lending to business owners who might be rejected by big banks because of their updated application considerations and tendency to look at the bigger picture. 

The only drawback of these quick online options is that many options come with higher APRs. Some online loans carry interest rates that top 20%, whereas traditional business loans are likely to have rates under 10%.

However, for many small businesses, fast and timely funds help increase production, manpower, diversification, and scalability. For many, this quick support supersedes the higher interest.  

Let’s help small businesses thrive 

There’s a strong relationship between small businesses and the economy. For the economy to do well, start-ups need to be in a position where they can grow. Their success drives up the economy and national spending, while their downfall can negatively impact the economy and inflation. Generally speaking, if small businesses are not doing well, corporations and financial institutions are also likely to suffer.

If big financial institutions continue not to help more small businesses, it is comforting to know that there are convenient online lending options that provide quick, reliable funding. 

These online lenders will continue to give small businesses—everything from the local mom-and-pop corner store to the growing startup—the ability to grow their business, hire new people, run marketing campaigns, launch new products or services, compete with larger competitors, and invest in new supplies.

Disclaimer

This content is for educational purposes only and should not be construed as professional advice of any type, such as financial, legal, tax, or accounting advice. This content does not necessarily state or reflect the views of Bluevine or its partners. Please consult with an expert if you need specific advice for your business. For information about Bluevine products and services, please visit the Bluevine FAQ page.

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Disclaimer

This content is for educational purposes only and should not be construed as professional advice of any type, such as financial, legal, tax, or accounting advice. This content does not necessarily state or reflect the views of Bluevine or its partners. Please consult with an expert if you need specific advice for your business. For information about Bluevine products and services, please visit the Bluevine FAQ page.