If you are a small business owner, you are probably familiar with the common practice that many banks don't lend to small businesses. But why, especially if small businesses are the engines responsible for economic growth?
I'll attempt to answer this with the following key points. They are;
1. Lack of financial intelligence by small business owners
2. Less profit on small loans
3. Lack of collateral
Lack of financial intelligence
How can these small business owners keep accurate records at all times?- records which assists the bank in making credit decisions. Can they proactively sway business dealings in their favour via an apt knowledge of their business environment? What about their credit worthiness, are they constantly being checked by a credit bureau. These are important questions that require an answer before any decision on lending to SME's is made.
Less profit on small loans
Banks prefer funding large businesses because of the spread they get from them. Regulators have increasingly made it difficult to earn as much as before. The interest rate on SME loans are constantly being reduced to help the business owners. This in no doubt deters the banks from lending to these businesses.
Lack of collateral
Most banks usually require collateral to give out a loan which acts as a guarantee that the loan will be repaid. The amount that the banks will lend often depends on the value of the collateral. This becomes a major challenge for small businesses which may have no valuable asset to offer as collateral.
The question now for both parties is, Can we reach an agreement? That will be answered in subsequent posts.
I'll attempt to answer this with the following key points. They are;
1. Lack of financial intelligence by small business owners
2. Less profit on small loans
3. Lack of collateral
Lack of financial intelligence
How can these small business owners keep accurate records at all times?- records which assists the bank in making credit decisions. Can they proactively sway business dealings in their favour via an apt knowledge of their business environment? What about their credit worthiness, are they constantly being checked by a credit bureau. These are important questions that require an answer before any decision on lending to SME's is made.
Less profit on small loans
Banks prefer funding large businesses because of the spread they get from them. Regulators have increasingly made it difficult to earn as much as before. The interest rate on SME loans are constantly being reduced to help the business owners. This in no doubt deters the banks from lending to these businesses.
Lack of collateral
Most banks usually require collateral to give out a loan which acts as a guarantee that the loan will be repaid. The amount that the banks will lend often depends on the value of the collateral. This becomes a major challenge for small businesses which may have no valuable asset to offer as collateral.
The question now for both parties is, Can we reach an agreement? That will be answered in subsequent posts.
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