If you think it seems more difficult to get a loan nowadays, you’re not alone. The criteria for acquiring loans has become more stringent in the years since the 2008 financial crisis. Meanwhile, interest rates are at historic lows, giving lenders less incentive to take on risk. This has brought the United States and many other countries to a situation in which many small businesses and entrepreneurs have more difficulty accessing borrowed cash.
So, why is it so difficult to get a bank loan? How has the criteria changed? More importantly, what can your small business do to secure a loan in such a difficult lending environment? Let’s look a little closer at the state of lending institutions to answer these questions:
Why Bank Loans Are Scarce
Virtually every facet of the economy has been affected by COVID-19, including banks. The stock market took a nosedive in mid-2020. Subsequently, millions of people lost their jobs while thousands of businesses shut their doors for good. The situation was only made worse by the fact that banks have less capital than ever before. Fortunately, the government has passed legislation to make it easier for families and businesses with less than perfect credit to get an emergency loan.
Though many small businesses are already preparing for a potential post-Coronavirus recovery, COVID-19 has shaken people’s confidence in the future of the economy. When people, businesses, and investors lose confidence in their financial future, they are less willing to take on risk. The same holds true for lending institutions. Banks don’t want to overextend themselves and lend out more than they can afford to lose. As a result, fewer small businesses can get access to loans.
Finally, the lack of financial security and reduced income has had a direct impact on credit scores. Businesses have to rely more on credit and are less able to make loan payments. This means that average credit scores are lower than ever, giving banks even less incentive to lend.
Bank Loan Criteria
While the factors above explain why loans are scarce, they don’t fully explain why it’s more difficult for business owners to get loans. So, let’s see how lending standards have changed:
- Credit Scores – Prior to 2020, you could probably secure a sizeable ($20,000+) personal or business loan with a moderate or high-interest rate if you had a score of 675 or above. Since then, the goalposts have shifted. Now, you will probably need a score of at least 700 to secure a similar loan.
- Collateral – With larger loans, you’re often asked to provide collateral in the event that you are unable to pay back your loan. In the past, many banks did not require collateral for smaller loans. However, that has changed. Now, you will almost certainly need to show that you have enough assets to put up as collateral.
- Incentive – Finally, it’s important to note that low-interest rates give banks less incentive to lend. As a result, even if you’re in good financial standing and have collateral, you may not be able to get the kind of loan you want. It’s a frustrating situation that will take time to adjust and recover from.
How to Get a Small Business Loan in 2021 and Beyond
If you want to secure a small business loan in the years to come, you’ll need to take action now. First and foremost, you need to ensure that you’re in good financial standing. This means building your credit score so that it is at least 700. Ideally, your credit score should be 750 or higher if you want to secure larger loans.
Next, you will need to make sure that you have a good reason for the loan. Create a successful business plan because whether you want to open a new business or grow your existing one, you need to prove to the bank that the loan will serve a good purpose. This can especially help in a hostile lending environment.
Finally, make sure that you can show proof of reliable income. 2020 has been a difficult financial year for many people. If you can show proof that you have a stable income that has survived these difficult times, you’ll be better positioned to secure a loan with a reasonable interest rate.
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