Small Business Loans are Broken

Small Business Loans are Broken

Any business owner with capital needs has likely had the unenviable task of approaching a bank to inquire about a loan. What makes this process so unpleasant? The mountain of paperwork, repeated conversations, and seemingly unnecessary documentation the bank requests only to deliver a non-committal “Maybe” or the more likely “No.”

A new report by Charles Wendel of Financial Institutions Consulting (FIC) suggests that borrowers may not be the only ones hurting from the infrastructure around small balance lending. In his report titled “Fixing Small Business Loans” (, he illustrates how many community and local banks have created such an infrastructure around the small balance lending process that most loans smaller than $250,000 actually lose money!

Lending products are often created by a product team, reviewed by a legal team, marketed by a sales team, underwritten by an underwriting team, signed off by a loan committee, funded by a closer, and finally monitored by a compliance team. With that many cooks in the kitchen, its no wonder that the prospect of issuing a small-balance loan may be a real money loser for that bank.

Said another way, small-balance loans are never going to be a priority for traditional lenders. The need to spread all the costs outlined above requires a larger balance for the bank to even breakeven. Therefore, small business owners with reasonable capital needs are fighting an uphill battle when looking for financing within the traditional banking sector. Small balance borrowers simply aren’t an attractive target customer for even local community banks.

While it would seem the lack of interest in making small balance loans is bad enough, there is one aspect of this reality that may be even more costly to small balance borrowers…TIME. While banks are not interested in making small balance loans, business and regulatory realities require them to at least engage with most borrowers. As such, a small business owner can get caught in a back and forth process with no realistic end in sight. Banks often go to great lengths to avoid extending credit without having to offer a hard “no.” The time spent on these endeavors, the cost of document compilation, and the burden of financial statement preparation serves as a hidden cost facing your business and can often take you away from your primary responsibilities.

Small Balance Loan Solutions

One solution for small balance borrowers is to seek out a private lender providing alternative financing solutions. While banks generate loan costs with the many layers of bureaucracy and regulation detailed above, private lenders can often avoid that red-tape and make financing decisions on small balance loans quickly and with minimal supporting documentation.

When seeking a small balance loan, it is even more important to look for a direct private lender, one that has direct access to the capital necessary for funding your small balance loan. Some private lenders actually serve as brokers or representatives of an investment committee that can often have similar bureaucracy to a bank when it comes to making loans under $500,000.

Worth Avenue Capital, LLC has been providing direct private loans to a variety of small business throughout New England and New York since 2008. We are eager to help you your business succeed, and small balance loans, and the particular level of service and care they require, form a substantial portion of our portfolio. Please, do not hesitate to contact us at worthavenuecapital@gmail.comor 203-605-4082. Our experts can understand your situation and work to provide a financing solution that can keep your business operating and growing.