A Primer for Entrepreneurs Looking for Small Business Loads.
Contrary to popular belief, the Big Banks are not in the lending business. They are in the fee collection business. If you’re a small business owner, read on to learn when and when not to use a bank for your small business loans.
At the end of every month the banks push a button and every account is charged a fee (which adds up to billions of dollars between all the banks every month). Some accounts get the fee back because they have kept the minimum balance for the whole month (which the bank lends out without paying you anything for the use of your money) and the rest simply live with the fee without much recourse.
Yes, the banks do lend money to businesses. However, they do so only with security. For small businesses this is usually hard security (collateral mortgages, term deposits etc.) plus personal guarantees. For large businesses the security is the business.
There is another reason that the banks offer small business loans and it’s not because they are nice or feel any obligation to help small and medium-size businesses. They do it because they realize if they give a small line of credit to a company they would have the first chance at the client’s personal banking business.
A senior Vice President of a bank once explained why the banks puts out small lines of credit to businesses and it has nothing to do with pressure from the Federal Government to do so. The bank realized that on a $25,000 line of credit they could not earn enough to take the risk. If the account worked perfectly they would earn around $1,000 for the year (probably a few hundred more with the fees they charge today) and if one account went bad then they would have to have 25 accounts that worked perfectly to breakeven. However, the bank figured if they gave the client the line of credit they would have a great chance on securing some or all of the client’s personal banking needs such as their mortgage, RSP, RESP, car loan, credit card and personal accounts. All of these generate fees, inexpensive cash to borrow from the depositor and then re-lend. Now the small $25,000 line of credit might produce 100’s of thousands of new borrowing and/or savings from the customer. Now it was worth the risk to lend the money.
What does this all mean for your business? If you have security (a mortgage, significant business assets, term deposits, and so on) the bank will lend you money. They rarely care what your business is so don’t waste your time selling them on your business idea.
So before you waste your time going from bank to bank, ask yourself one question, the one and only question the bank really cares about “Do you have hard security”? If you answered “yes,” go to the bank, if you answered “no.” call Money Consultants.
Money Consultants has helped small business owners like you with much needed capital to help grow and prosper right when your business needs it most.