Bank Credit for SMBs

Financial credit is the "holy grail" of SMB financing -- much sought-after, but seemingly hard-to-get. Happily, there are sources other than big banks who do extend credit to SMBs. We'll tell you who and how.

Traditional Bank Credit

You may have an image of putting on a business suit, walking into a granite-and-brass lobby with a folder of documents, and emerging with a sizeable chunk of cash for your small business. That would be a dream. Sorry to wake you.

In reality, if you are what we consider a small-to-medium business (SMB), a traditional bank will almost certainly not be able to help you. What do we mean by that?

There are two types of banks, roughly speaking: mega-banks and community banks. To put it in perspective, there are roughly 6,000 banks in the U.S., but half of that money is in the top 6.

How Banks Look at SMBs

Mega-banks act like huge manufacturers: they need to be able to stamp out thousands of units in a cookie-cutter. Community banks act like craftsman shops: they hand-craft each unit personally. But they're still producing the same basic products.

Banks mostly try to sell term loans and lines of credit to businesses. A term loan is more or less like a mortgage, but usually for a term like 3 years. A line of credit is somewhat like a credit card that can be spent down -- but it usually needs to be "zeroed out" once a year.

But it's not worth it for a bank to try to sell these products to an SMB. They won't even talk to you unless they can make a big enough line or loan to make it worth their while. Here in Seattle, that number is something between $2 and $5 million, minimum.

Why Such a Big Minimum?

Banks on average make about 3.5% net interest margin. Meaning, for every $1 million they put to work, they get about $35,000 back to cover their expenses and profit.

That nice gentleman with the silk necktie and the well-printed business cards costs money, just like that granite-and-brass lobby. So they have to make the gentleman go find big enough deals to cover the costs.

What If You Do Need $5 Million?

Great! You've grown your SMB to the point where you can actually use a big enough chunk of capital to make it worth their time. Here's why you're still not going to get a line or a loan from your bank.

Banks generally require both lines and loans to be over-collateralized. That means you need to pledge assets that the bank values at significantly more than the dollars you get.

Also, your SMB must typically have been in business and profitable for at least three years. That's in business and profitable.

Is It Really That Bad?

Basically, yes. There are some great bankers out there who want to help, and some truly innovative approaches being tried. But this is a slow-moving, highly-regulated, risk-averse industry, and it's not going to change overnight.

But, there are alternatives. See our writeup on alternative sources of financial credit for more. And please let us know if you hear of banks doing good work in this space that can help SMBs.

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