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Why many banks don't provide funding for business formation

Recent estimates indicate that only around 19 percent of small businesses across the country -- including here in Georgia -- receive a loan from a big bank. That percentage increases to nearly 50 percent if the bank is small because smaller lenders tend to take advantage of the Small Business Administration's loan guarantee program. According to one source, just a handful of reasons explain why large banks are hesitant to lend when it comes to small business formation.

One reason is that big banks try to limit their exposure to risk. As the economy fluctuates, so does the ability of small business owners to repay loans. If the economy is weak, the consensus is that more small companies will default on their loans, making them a bigger risk than larger companies. Smaller lenders often do not have the resources to assess the risks when lending to entrepreneurs.

Because small businesses tend to be diverse, it is difficult to create one set of standards for underwriting loans to them. Not only does this make it difficult for banks to make loans, but to sell them as well. In addition, making loans to small businesses can sometimes cost just as much -- if not more -- than any revenue the bank may receive from the loans.

Fortunately, there are several alternatives to big banks. It is just a matter of finding a lender that fits a Georgia entrepreneur's business formation needs. Dealing with any lender, however, will undoubtedly require a plethora of business acumen and legal paperwork. It may be beneficial to seek out the advice and assistance of someone well versed in these areas before signing on the dotted line.

Source: Forbes, "Is The Boom In Small Business Finance Real?", Marc Prosser, Aug. 14, 2014

Source: Forbes, "Is The Boom In Small Business Finance Real?", Marc Prosser, Aug. 14, 2014

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