Are Big Banks Missing Out on Small Business Loans?

Big banks are in the liability business. They want to minimize risk on investments and, historically, have been apprehensive about lending to small companies, which tend to be less profitable and higher risk than more established businesses. Essentially, big banks don’t need to lend to small businesses to survive and are also beholden to stricter regulations on lending, making them more wary of approving loan applications for new home-grown businesses or mom-and-pop shops with less established flows of revenue.

Even as the economy rebounds and small businesses start to reinvest in their companies, approval rates of small business loans at big banks have inconsequentially improved from 13.6% in June 2021 to 13.8% in July. Overall, the approval percentage at big banks is about half what it was in early 2020. 

This all means that small businesses are more likely to pursue an online business loan than going to a traditional big bank. Let’s dig into the pros and cons of big bank business loans, the best way for small business owners to lock down loans, and why more lenders are going digital.

The pros and cons of online small business loans

Even for successful, credit-worthy business owners, big bank loans can be hard to come by. The U.S. Small Business Administration reports it costs small businesses anywhere between $1,000 to $5,000 to start a small business from scratch. Loan requests of that size, especially without a steady proof of revenue, are not likely to be approved by big banks. However, online business loans can be a more flexible and convenient financing option for small businesses looking for a cash infusion to help them grow.

Here are some of the benefits and drawbacks of online loans for small businesses:

Pros of an online small business loan 

• More lenient loan approval requirements 
• More options for lower credit borrowers
• Quicker loan processing and funding timelines
• Flexible term lengths, loan amounts, and payment schedules
• The entire application, underwriting, approval, and funding process happens online
• No collateral required 

Cons of an online small business loan

• Typically higher interest rates
• Less likely to have access to personalized services
• Additional fees and charges, like origination fees, service and processing fees, early repayment fees, and insufficient funds fees — all of which can cost more than you bargained for over the life of the loan

Why business owners might prefer online lenders to big banks

New and growing small businesses typically come to this crossroad: Find an investor to give your business a quick cash influx, or apply for a loan (which, for big banks, often requires proof of a certain amount of revenue, which can be difficult to provide as a new or small business).

Small business owners staring down this Catch 22 may prefer an online lender to a big bank for one simple but important reason — a higher chance of loan approval.

Big banks can work with small businesses through digital lending

There are myriad benefits to digital lending. More consistent lending decisions, improved compliance, and streamlined e-signing and notarization capabilities that improve the borrower experience and increase the volume of loans a lender can close in the same amount of time.

Some banks and credit unions now partner with FinTech companies and digital lending platforms, which make it possible for lenders to implement a fully-digital loan origination process. Offering online loans similar to those being offered by nontraditional banks will help small businesses and bring in more revenue for big banks.