Small Businesses Are Less Likely To Get Loans

Small Businesses Are Less Likely To Get Loans

Small businesses have a difficult time taking out a loan compared to large corporations. But even medium-sized companies are already much better off. With limited access to banks and traditional loans, small businesses may opt to take out loans from non-traditional sources such as southeasttitleloans. There are various loans that SMBs may take however the difference is on the interest on top of the principal loan amount.

Reasons Banks Reject your Business Loan Application

Small businesses are more likely to be refused credit requests than medium-sized businesses and corporations. This is the result of a current study by the European Commission on the creditworthiness check of SMEs. A total of 200 interviews were carried out for the study with representatives of various stakeholders, including banks, financial organizations, company representatives, national authorities, and regulators. In addition, a survey was conducted through the Enterprise Europe Network that received 466 responses, and another survey in Italy brought 70 responses.

While the average rejection rate for credit inquiries in the EU was 12.6 percent, it was 17.9 percent for micro-businesses and 13.5 percent for small businesses. In contrast, credit inquiries from medium-sized companies were only rejected to 5.7 percent, and inquiries from large corporations only in 3.4 percent of cases. Even with interest rates, the SMEs surveyed still point to problems despite some improvements. 34 percent of those surveyed stated that interest rates had risen in the past six months, but in 2011 it was 52 percent. In other costs, 43 percent of those surveyed saw an increase in the last half of the year – here too, small companies were more affected than medium-sized and large companies.

In an international comparison, it was also found that credit requests from German companies were fully met in 86.8 percent of cases, the rejection rate here was only 2.5 percent.

Difficult rating for small businesses

The second major focus of the study was on the rating systems of the banks and the feedback for the companies. In view of the higher rejection rate, the authors assume that the feedback from the banks is particularly important for the smaller companies, as it can help them with future loan applications.

According to the study, the majority of the loans granted come from banks with internal rating systems (IRB), a share that is expected to increase in the future. Both qualitative and quantitative data flow into the evaluations, with the weighting varying from bank to bank. On average, however, the proportion of qualitative data is 20-40 percent. However, the collection of quantitative data can become a problem for small companies, as they often cannot provide sufficient financial data. The collection of qualitative data is more expensive and tends to be more subjective.

The fact that it is more difficult for small companies to obtain meaningful data as the basis for the assessment could also be the reason why small companies in particular show significantly less interest in their rating at the banks. The most important thing for them is whether and on what terms they receive the desired loan. Even with rejection, some of the study authors say they are not interested in the reasons, but instead look for an alternative loan instead.