Banks: “We’re lending to small businesses. Yay!” Small Businesses: “B.S.”

The Small Business Loan Fallacy

I talk to many small business owners, customers, partners, and friends, who all tell me they can’t get loans from banks. (Thankfully, this isn’t problem for us. I’m the CFO of Junction Networks, and we are fully bootstrapped and profitable.) On the other hand, I hear so much in the news about the $ billions of federal programs that are helping small businesses. So, I thought I’d look into the matter.

Yes, it’s bullshit. Sort of. Banks are lending, but only indirectly to small businesses. Here are the top three questions a few banks asked when we discussed working capital loans:

• 1. Is there any shareholder of the company who owns more than 20%?
• 2. Does your business own the building in which your office is located?
• 3. Do the owners own their homes and have available equity?

Puzzled? Here’s what’s going on.

Lenders don’t care what your business is doing, how successful the operation is, nor what your prospects are. They ASSUME you are going to default on your loan. Therefore, from the onset, they want assets tied to the loans, which they can recover WHEN you default, not IF you default.

Let’s revisit the questions again.

• 1. 20% Shareholder

  The lender wants to know on whom they can contractually pin the loan if the business has an issue. They want to check that shareholder’s assets and confirm that s/he can personally repay the loan when the company defaults. I’m puzzled by this… If I have the assets to repay this loan, why wouldn’t I just lend the money myself and earn some interest?

• 2. Do we own our building?

  This is just stupid. We’re an Internet company. Why would I own my building? I get it. They want the building as collateral. But, what new service business in America puts “buy office building” in their business plan?

• 3. Home equity

  I wonder how many people answer “why yes, I own my home, mortgage free, and I’d be happy to pledge it as collateral for my business.”

These questions have nothing to do with business plans, profitability, and projections. It seems our banking system is out of whack with the American entrepreneurial spirit we hear so much about in the news.

If you are a lender, you will disagree with me and say, “we are lending but we have to manage our risks too.” But, I don’t buy that.

Banks are removing the risk of the businesses they lend to buy roping in secondary collateral sources. They are essentially lending to wealthy individuals or holders of mortgage-free commercial and residential real estate. The small business is just a venue for making the loans.

So, it seems you can only really get money lent to you if you don’t really need it to begin with. Sorry Small Businesses!