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SMEs Struggle to Obtain Business Lines of Credit

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Over the years, many SMEs have found it increasingly difficult to be approved for business lines of credit. It’s a double-edged sword: on the one hand, the entrepreneurial flair of the business owner is not backed up by hard data in the form of strong revenue streams, a sizeable asset balance sheet, and huge levels of inventory. And on the other, these businesses drive economic growth.

SMEs are run by individuals whose desire to take on risk is not always quantifiable. The aspirations of business founders do not always translate into approved lines of credit when these SMEs approach bank and non-bank lenders for personal loans, business loans, and other lines of credit. Businesses require credit lines for all manner of daily activities such as inventory, cash flow, a capital cushion, customer payments, and financing operations.

US Start-ups Face Challenges in Credit Financing

On Tuesday, 8 August 2017, a comprehensive report was published by a dozen Federal Reserve Banks. The report was a scathing indictment of the credit loan industry in the United States. While SMEs contribute overwhelmingly to employment in the US economy, the majority of these start-up enterprises face immense challenges when applying for business loans. According to the results of the study, more than 80% of these SMEs were required to use their own funding to make up the shortfall. This paints a negative picture of US job growth and prospects.

The Fed has been laying the necessary groundwork to make it easier for banks and non-bank institutions to loan money to clients. In the years since the global financial crisis, monetary policy has been accommodative, with trillions of dollars injected into the US economy, and interest rates slashed to multi-decade lows. While employment gains have been notable, real wage growth has stagnated.

Start-ups are increasingly reliant on lines of credit for their survival. These companies need to secure financing for all manner of business activity. It is impossible for them to operate in a competitive, high-tech arena without this finance. Accessing capital is proving to be an insuperable challenge to many businesses. This is especially true with unsecured loans; companies that do not have physical assets to safeguard the lender’s investment. Start-up organizations are associated with a higher risk profile, especially those that have been in business for a short period of time. 

Expediting Loan Approvals for SMEs

These new enterprises often receive far less financing than they need in the markets. The 2016 Small Business Credit Survey Report on Start-up Firms indicates that businesses that are less than 5 years old are associated with high levels of loan declines. According to the stats, 31% of these businesses did not receive the loans they applied for, and 28% of them were declined completely. The general preference for new SMEs is bank loans.

However, there is an increasing push towards non-bank lenders for financing needs. Strict regulatory constraints are often imposed on businesses and individuals seeking loans. Things like credit reports are extremely important when determining the likelihood of a business receiving a credit loan. 76% of banks tend to approve at least a partial percentage of SME loan applications from low risk companies. Only 45% of higher risk SMEs enjoy partial approval from banks.

Various major financial institutions such as JPM are now working with other lenders to offer small businesses loans. This new venture is designed to expedite the approval process. Typically, small and medium enterprises are required to wait weeks before they get loan originations processes approved.

By cutting that time, SMEs will no longer be faced with insurmountable pressures when applying for business credit. Many of the big banks in the US such as Bank of America, Wells Fargo Corporation, and Chase are now looking at similar models to try and expedite loan approvals for start-up companies.