Why Aren't Banks Lending to Businesses? (2024)

Banks aren’t what they were a few years ago. Crippled by a high-rate environment and an inflationary economy, the banking industry is tightly holding onto their deposits instead of lending the cash to small businesses.

One door may have closed, but another one opened. The slowdown in bank lending has pushed businesses away from traditional lending sources and toward non-bank funding options.

National Business Capital’s diverse lender platform makes finding the right non-bank option for your business easy and efficient. With one application, you unlock all the money you qualify for, then select the right option alongside guidance from your dedicated Business Finance Advisor.

Continue reading for more information about the state of bank lending in 2023 and what entrepreneurs can do to continue growing in this climate.

Why Aren't Banks Lending to Businesses? (1)

Why Aren’t Banks Lending?

There are a number of factors for why banks aren’t lending.

  • First, they are seriously constrained by regulators who watched the bank runs on Silicon Valley Bank and Signature Bank in early 2023 and decided to tighten the amount of money banks need to hold in reserve.
  • Second, banks are voluntarily holding more money in reserve because they expect delinquencies to rise as rates get more expensive and consumer finances become strained.
  • Third, they are uncertain of whether a recession might be on the horizon, which would push the rate of delinquencies and defaults even higher.
  • Fourth, regional and small banks, which typically lend to small and medium-sized businesses, are watching their significant loans to commercial real estate companies come undone. With work from home continuing to look likely for the foreseeable future, commercial real estate, especially in downtowns, is looking very shaky.
  • Fifth, rates are not certain to remain stable, with the Chair of the Federal Reserve recently signaling that rate increases are not off the table, meaning all the above could become even more severe for banks.
  • The sixth reason is related to interest rates – banks’ cost of capital is rising along with interest rates as consumers are demanding higher yields on their deposits. Not only does that take liquidity out of banks in the form of higher payouts, but it also means that banks are seeing outflows to other banks that are paying higher interest.

All of these factors (and more) are combining to make banks – notoriously risk-averse as they are – even more cautious. They are prioritizing their existing relationships to reduce their risks, and even among those relationships, they are focusing on the very largest companies, which are even lower risk.

Small and medium businesses that used to have warm relationships with their banks and bankers are being left out in the cold as those very same bankers turn away from them. In many cases, they are not only not issuing new loans but are demanding lines of credit be paid down with very little notice or concern for their former customers.

Entrepreneurs are shifting their focus to the world of non-bank lending as a lifeline for capital in an environment where banks won’t open their doors. Not only are they offering access to immediate funding in large amounts, but creative solutions are allowing entrepreneurs to unlock opportunities and keep their businesses moving forward.

When Will Banks Start Lending Again?

It’s uncertain how long the current credit conditions will persist, but borrowers can expect a higher rate environment for at least the next few years. After the 2008 financial crisis, the economy took years to recover, but it wasn’t some light switch where everyone immediately knew the conditions had improved. Instead, people suddenly found themselves in the middle of a booming economy.

In the words of National Business Capital’s CEO, Joseph Camberato, “The winners of this market won’t be the businesses that held tightly onto every dollar; it will be the businesses that refused to slow down.” Once the economy improved, the businesses that kept pushing forward had already built their foundation to scale, and those who mimicked the bank’s risk-averse behavior were playing catch up. In 2023, it’s safe to say that the cycle will repeat itself.

How Have Non-Bank Lenders Filled the Gap?

Banks and credit unions are subject to the dictates of the economy, whereas non-bank lenders operate in the private sector and can make decisions as they choose. Most non-bank lenders don’t deal in consumer/business deposits, either, which allows them much more freedom and flexibility when lending.

Non-bank lenders have gained immense popularity in the last decade, but the current lending environment has made them even more attractive. Here are a few of the ways entrepreneurs are leveraging non-bank options, even if they already have existing bank financing:

  • Leveraging cash flow – instead of assets – for funding
  • Accessing additional capital outside of an existing facility with a subordinated debt solution
  • Negotiating their terms to align with their opportunity/challenge

Non-bank lenders are much faster, more accessible, and – most importantly – are offering access to capital right now. They don’t need assets, and they don’t always require you to pay off your existing financing.

Why Aren't Banks Lending to Businesses? (2)

If you have a current low-rate bank loan, but your bank isn’t offering enough capital to stay relevant, there are opportunities to access additional funding without refinancing or taking out a new loan entirely.

Apply Now to Learn More

How Can National Business Capital Support Businesses?

Business doesn’t stop just because banks slowed their lending. If you want to maintain momentum, our award-winning team can match you with the most competitive offers you qualify for within our diverse lender platform. National Business Capital’s network of lending partners offers a variety of lending products that you can tailor to your unique circumstances, including subordinated options that can offer additional capital with current loans.

Banks won’t lend, so try us instead. Complete our easy application to get started with our team. We’re here to make your opportunities come to life.

Why Aren't Banks Lending to Businesses? (2024)

FAQs

Why Aren't Banks Lending to Businesses? ›

Uncertain Economic Outlook: Banks are already holding on to more deposits out of fear of increased delinquencies and defaults. A potential recession could further increase default rates, leading many banks to issue fewer loans and demand businesses pay down lines of credit and loan balances immediately.

Why are banks not lending as much? ›

Crippled by a high-rate environment and an inflationary economy, the banking industry is tightly holding onto their deposits instead of lending the cash to small businesses.

Why don't banks lend to small businesses? ›

In the wake of the recession, increased federal regulations have resulted in banks being more conservative about the amount of risk in their investment portfolio. Small businesses inherently represent more risk than large corporations, making banks hesitant to lend to them.

Why are banks not willing to lend money? ›

Ans: The banks may not lend certain borrowers due to the following reasons: Banks require some necessary documents and collateral as security against loans, some persons fail to meet these requirements.

Why might a bank refuse to lend money to an entrepreneur? ›

Banks are often cautious about lending to small businesses because they see them as risky or not profitable enough. They have strict rules and regulations to follow, and small businesses may not meet their criteria. Private credit investors are more willing to take risks and can be more flexible in who they lend to.

Are banks lending less now? ›

Higher interest rates prompted banks to restrict lending. In a Fed survey last summer, many banks said they had tightened lending standards. Almost no banks said they had made borrowing easier. Some banks continue to tighten credit standards in 2024, according to the latest Fed survey, taken in January.

Why are so many banks struggling? ›

In 2023, America saw its highest amount of bank closings since the 2008 recession. The increase in mobile banking use, inflation and interest rates, and real-estate struggles all contributed to why 2023 experienced so many banks shutting their doors.

Why don't banks lend to restaurants? ›

Credit Reasons: Why You Might Be Denied

In many cases, business financing products review both the personal credit history of the business owner and the business credit score. It's a process wherein lenders look for evidence of a responsible borrower and evaluate business history.

Why is it so hard to borrow money? ›

The banks revealed that they are being more strict with their loan standards for multiple reasons, including: an uncertain economic outlook, a decreased risk tolerance, funding cost concerns, and effects of legislative changes.

Is bank lending slowing? ›

The big U.S. banks are reportedly facing a slowdown in lending growth due to rising interest rates, and it is expected to hurt their profits. Net interest income, a key driver of earnings for banks, has been boosted by the Federal Reserve's benchmark rate hikes over the last 18 months.

Can banks lend all the money they have? ›

Banks can't lend out all the deposits they collect, or they wouldn't have funds to pay out to depositors. Therefore, they keep primary and secondary reserves.

How do banks decide to give loans to businesses? ›

Credit score: Lenders may consider your personal credit score, your business credit score, or both. The higher your score, the more likely you are to be approved, and the better the loan terms you are offered. Cash flow: Lenders will want to see how much money your business takes and how you spend it.

Why is it so hard to get a loan right now? ›

Americans are having a harder time getting approved for auto loans, as banks worry over the risk of defaults at a time when high interest rates and elevated car prices are squeezing budgets. With borrowers struggling to make their monthly car payments, banks are responding by tightening credit standards.

Are banks making it harder to get loans? ›

Americans saw banks make lending standards tighter for businesses, while demand also fell.

Is it harder to borrow money now? ›

Banks are purposely making it harder for consumers to obtain loans, according to a new survey conducted by the Federal Reserve. Standards for business, mortgage, credit card, automotive and other types of loans are continuing to be tightened by banks due to a rough economic climate.

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