To most small businesses, “bank” is a four-letter word. They have a love-hate relationship with their bank.
If we are really honest, it’s mostly a hate relationship. Banks are always disappointing to work with and are never there when you really need them. Think of them as a person that lends you an umbrella when it’s not raining and asks for it back as soon as it starts.
The business of the bank was supposed to be simple. You have a business you want to grow or a profitable business you want to buy and need capital. Why not ask the bank for a loan? Isn’t that what banks do?
No actually, banks are not in the business of lending small businesses money for growth.
Banks make money by:
- Investing your deposits at a higher rate than the pay you.
- Charging 30% interest on credit cards.
- Monthly bank charges like account fees, wire transfer fees or insufficient funds fees.
- Secured property mortgages at rates higher than they can borrow at.
- Lending application review fees.
- Wealth management fees.
In fact, lending money to a small business (even with the help of the SBA covering 90% of the risk) is something a bank really does not want to do. There is way too much risk in this activity compared to other ways of making money.
Remember, banks are not even in the business of taking risks even though the historic default rate for SBA loans is 3%.
Here are some of the ways banks hurt small businesses daily.
- The promise of working capital loans that never materializes.
- They “call the loan” when the business is going through a tough financial patch.
- They give a term sheet on a business you want to buy, but then 60 days later deny you the loan or worse yet, give no reply. In this time, you have already spent money on loan application fees and other legal deal fees.
- They ask for the same due diligence information over and over and over again.
- They don’t have qualified business people as bankers who really understand what they are doing or have any authority to make any decision.
- They never keep their commitment deadlines. Do they lie or just don’t care?
I think the biggest problem is that banks give you the illusion they can lend you money. This costs you time and money. If they just said no from the start, entrepreneurs would find other ways to get the capital they need.
Tell me about an experience you have had with a bank.