The decline in bank loans to businesses is not a new trend. Not all business owners realize this, but they are increasingly less likely to receive business loans from financial institutions. In fact, bank loans to businesses have been declining since the 1980s. According to the Bank Policy Institute, “Since the 1980s, the decline in the bank share of business debt has been gradual. It dropped from about 30 percent in the early 1990s to 20 percent in 2021, with some oscillations based on business cycles.” The process a business has to go through to get a loan is more arduous than ever and less likely to meet with success. Why is this the case, and what alternatives are available to small businesses?
The cause of a decline in bank loans to businesses
Since 1980, banks have slowly narrowed the stream of funding they provide to businesses. This affects all sectors. Whereas other sources have increased their market share. This includes private equity, hedge funds, loan mutual funds, finance companies, business development companies, asset-based lenders, and factoring solution providers. Businesses are certainly getting their money from somewhere, but not necessarily from banks.
The main reason appears to be the progressive tightening of regulatory constraints, applied only to banks. Simply put, businesses have to jump through more hoops to get approved. This in turn leads to more declined applications. Large corporations are more likely to be able to comply with the strict criteria that banks enforce. Mid-sized and small businesses, however, are forced to turn to nonbank lending. Not only are regulatory requirements restrictive, but capital requirements are often out of reach as well.
Factoring As An Alternative
Among the nonbank solutions offered to businesses, asset-based lending and invoice factoring have proven to be the most popular and effective. Factoring services enable companies to sell their receivable invoices for immediate cash advances, while rebates are paid later on, minus service fees. The client’s credit record is of less importance, and there are no capital requirements. The arrangement does not involve any debts at all. The business simply sells invoices to the factoring company.
Kore Capital is an experienced and trusted financial services provider that can offer you all the benefits of factoring services and other alternative funding methods. Contact us for more information.