20 Mar The Need for Fast Commercial Loans in Small Business Lending
March 20th, 2017: For a small business owner, it would seem like borrowing money should be a simple prospect. However, for most banks, making a small business loan (say one in the $100,000 range) requires just as much effort and creates as much if not more risk exposure than a larger loan. The high origination costs of these loans, plus the infrastructure required to process and maintain such loans mean that for a loan below the $100,000 mark, banks often lose money. The banks’ high fixed costs have made it harder, slower, and often downright impossible for a small investor to borrow.
While banks should not be expected to keep making loans that don’t make sense for them from a financial standpoint, it creates major obstacles for those trying to borrow. In fact, this is just one more reason why it has become more difficult for small businesses or investors to borrow money.
Why Does It Cost So Much for the Banks?
For a bank, there are six major costs for making and holding a small business loan. These costs include origination, underwriting, review, operations, collections, and compliance. The costs are usually as high for a small loan as they are for a large loan. Plus, a smaller loan is more likely to be to an “untested” borrower, forcing the bank to reserve for a higher likelihood of default. Even if a small loan in default is eventually paid back or collected through insurance, that process itself creates major costs and consumes valuable time for most traditional banks. So, a bank is much more interested in making the big loans where the costs are a much smaller percentage of the loan—and the interest earned will more than make up for the holding costs.
What’s the Solution for Business Owners?
For small businesses or investors that are looking to borrow $100,000 or less, the above news sounds bleak. However, there are other options. Alternative funding from a private lender is a growing option. Loans do not have to come from a traditional bank to come with the same benefits and safety.
Speed is a Bonus
The bonus takeaway for the borrower is that alternative lending is much faster than borrowing from a bank. A fast commercial loan means that not only is the borrower more likely to be approved, it means that the loan can be approved faster. For an investor or small business owner, time may be of the essence. Obtaining a fast commercial loan may mean that the business owner can be first to the market or enter a new area before the competition.
If you would like more information about small business loans and alternative funding options from the experts, check us out at Worth Avenue Capital LLC. As a private lender, we provide alternative financing for businesses of all sizes and with all types of lending needs throughout New England. We look forward to working with you too.