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How Does a Bank's Performance Impact Your Business' Loan Opportunities?

Adam Groff

September 14, 2015

There are a number of financial requirements to owning a small business, which sometimes include getting a small business loan from the bank.

However, when banks struggle to increase their profits, it can affect your chances of getting a loan.

Here are a handful of ways poor bank performance can affect the loan process for your small business….

Stricter Lending Practices

Small businesses just like yours heavily rely on bank credit in order to open up shop, but the recent recession has made way for extremely stringent lending practices.

Although this hasn't necessarily affected established businesses, small business loan seekers are receiving the most back-lash due to their minimal track records.

Banks have to protect their own assets above all else.

When banks underperform, as with the recent recession, they take fewer risks. Small businesses by nature are risky investments.

As a result, lending practices tighten in the small business department, which can make it harder for you to acquire a loan.

TARP Funded Banks

As a result of the financial crises, many banks received Troubled Assets Relief Program funds to compensate for the loss in assets. Although this helped salvage a large number of financial institutions, it also led to elevated risk policies.

Although many banks have fully recovered and no longer need TARP funds, the risk policies are still in place.

These risk policies limit the number of small business loans given out each quarter, which directly affects your chances of acquiring a small business loan.

Higher Interest Rates

Because of the risks involved with lending to small businesses, banks are slowly raising their interest rates.

This may not be the case with all banks, however many national banks still in recovery are turning to increased interest rates and fees, especially for small business loans

The article "Banks Struggle to Increase Profits: Higher Interest Rates Are Not the Solution" mentions the fact that many banks are using adjustable rate loans to offset their losses.

Adjustable rate loans fluctuate according to the Federal Reserve, which may or may not be beneficial to your small business.

Increased Credit Scores

You're probably aware that your credit score has a lot to do with the amount of credit a bank will give your small business.

However, what you're likely not aware of is the fact that banks have raised the minimum credit score requirement for small business applicants.

Before the financial crisis, banks would regularly grant small business loans to entrepreneurs with credit scores in the 660 to 700 range.

Now, most banks require their applicants to have a credit score that's 700 or above.

Focus on Collateral

As mentioned before, banks want to minimize their risk when it comes to lending money. When banks are struggling, they put more emphasis on how much collateral applicants have.

This isn't an issue for large businesses, but for small business loan seekers, debt-free collateral is hard to come by.

If you're in search for a small business loan, it's important to keep in mind some of the pointers mentioned above.

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