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Banks Tightening Credit Criteria for Small Business: Exploring Your Options

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Banks are still tightening credit for small businesses, making it challenging for them to secure funding. According to a recent article from Inc., 21% of banks have tightened lending standards for businesses with $50 million or less in annual sales.

This trend has been exacerbated by economic uncertainties, which impact the growth and stability of small enterprises. As a result, many entrepreneurs face hurdles in accessing the capital needed to sustain or expand their operations.

In this landscape, alternative financing options are gaining traction as viable solutions for small business owners seeking financial support. For example, it’s business as usual here at United Capital Source (UCS), as our network of 75+ private and nonbank lenders is still funding.

This guide explores why banks are still tightening credit for small businesses and your best alternative options. Specifically, we’ll answer these questions and more:

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    Why is it harder to get a Small Business Loan from a Bank?

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    More banks tightened lending terms for small businesses in the first quarter of 2024, continuing a trend from 2023. Many traditional financial institutions fear the current economic outlook and have become more risk-averse. As a result, they are approving fewer commercial and industrial loans (C&I loans), charging more for the loans they do approve, and issuing smaller loan amounts.

    Generally speaking, banks have been hesitant to lend to businesses since the economic crisis of 2008. At that time, alternative lenders stepped in to support small businesses by providing access to capital when the banks wouldn’t. This has also impacted consumer loans, such as mortgages or auto loans.

    Economic growth led to banks lending more in the years before 2020, but the COVID-19 pandemic caused similar economic turmoil. While the economy is recovering, 2023 saw yet more setbacks with the banks, starting with bank runs on Silicon Valley Bank and Signature Bank.

    Those bank runs, combined with economic uncertainty, created a perfect storm of risks and challenges regarding small business loans from a bank. Those challenges include:

    • Regulatory constraints.
    • Higher interest rates from the Federal Reserve Bank.
    • Disruption to commercial real estate loans.
    • Recession fears.
    • Fewer bank deposits.

    In a survey of loan officers from banks, they mention economic uncertainty as the primary reason for the continued decrease in lending and increase in credit scrutiny. One of the more alarming aspects of this trend for small business owners is that community banks – the traditional go-to source for small business loans – have also been tightening credit standards.

    Will Banks continue to Tighten Credit Criteria for Small Business Loans?

    Banks may continue to tighten credit criteria and reduce lending to small businesses due to economic uncertainty and potential risks associated with lending. Factors such as fluctuating market conditions and concerns about borrower repayment ability could contribute to stricter lending standards.

    Unfortunately, the Federal Reserve has not reduced interest rates, which continues to drive the current credit crunch. Despite increases in jobs and inflation starting to level off, the Fed still fears lowering rates due to CPI numbers. Until the Fed lowers rates, it’s unlikely to see banks start lending again and easing credit standards.

    What are my alternatives to Small Business Loans from a Bank?

    Fortunately, alternative lenders (and marketplaces like UCS) continue to step up and provide access to capital when the banks say no. Here are some alternative small business loans available through our lender network.

    Business Line of Credit

    • Funding Amount: $1k – $1 million.
    • Factor Rates: Starting at 1% p/mo.
    • Term: Up to 36 months.
    • Speed: 1-3 business days.

    A business line of credit is a flexible financing option that allows businesses to borrow funds up to a predetermined limit. It can be used for various purposes, such as managing cash flow, purchasing inventory, or covering unexpected expenses. Unlike a traditional loan, businesses only pay interest on the amount they actually use from the line of credit.

    Business Term Loans

    • Funding Amount: $10k – $5 million.
    • Factor Rates: Starting at 1-4% p/mo.
    • Term: 3 months to 5 years.
    • Speed: 1-3 business days.

    Business term loans provide businesses with a lump sum of money upfront, which is then repaid over a fixed term with interest. These loans are commonly used for significant investments, such as equipment purchases or expansion projects. The terms of business term loans can vary in length, interest rates, and repayment schedules depending on the lender and the borrower’s financial situation.

    Equipment Financing

    • Funding Amount: Up to $5 million per piece of equipment.
    • Factor Rates: Starting at 3.5%.
    • Term: 1 – 10 years.
    • Speed: 3-10 business days.

    Equipment financing allows businesses to acquire the necessary tools and machinery without a considerable upfront cost. This type of financing can help companies preserve cash flow and stay competitive by accessing the necessary equipment. It often involves leasing or borrowing funds to purchase equipment, with flexible repayment options tailored to the business’s financial situation.

    Invoice Factoring

    • Funding Amount: $10k – $10 million.
    • Factor Rates: Starting at 1% p/mo.
    • Term: Up to 24 months.
    • Speed: 1-2 weeks.

    Invoice factoring is a financial transaction where a company sells its accounts receivable to a third party at a discount. This helps businesses improve cash flow by receiving immediate funds instead of waiting for customers to pay invoices. It is a common form of financing companies use to manage working capital and maintain operations.

    Merchant Cash Advance

    • Funding Amount: $5k – $1 million.
    • Factor Rates: Starting at 1-6% p/mo.
    • Term: 3-24 months.
    • Speed: 1-2 business days.

    A merchant cash advance is a type of financing where a business receives a lump sum payment in exchange for a percentage of future credit card sales. This alternative funding option can benefit businesses with fluctuating revenue streams or those needing quick access to capital. However, it is essential to carefully consider the terms and fees associated with merchant cash advances before pursuing this financing option.

    SBA Loans

    • Funding Amount: $50k – $5.5 million.
    • Factor Rates: Starting at Prime + 2.75%.
    • Term: 10-25 years.
    • Speed: 8-12 weeks.

    SBA loans are government-backed loans designed to help small businesses access funding for various needs, such as starting up, expanding, or recovering from disasters. These loans often have favorable terms and lower interest rates than traditional bank loans, making them an attractive option for entrepreneurs seeking financial assistance.

    What are the pros and cons of Alternative Small Business Loans?

    Alternative small business loans offer several advantages over traditional bank loans. They often have faster approval processes, allowing businesses to access funds quickly. Additionally, alternative lenders may be more willing to work with companies with less-than-perfect credit scores. These loans also offer more flexibility in terms of repayment options, making them a viable option for small businesses looking for financial assistance.

    One major disadvantage of alternative small business loans is the higher interest rates than traditional bank loans. This can result in increased costs for the business over time, affecting profitability.

    Alternative Small Business Loan Pros & Cons


    • Faster approval process compared to traditional bank loans.
    • More flexibility in terms and repayment options.
    • Available to businesses with less-than-perfect credit scores.
    • Can be used for a variety of business purposes.


    • Higher interest rates than traditional bank loans.
    • Shorter repayment terms may result in higher monthly payments.
    • Some lenders may require personal guarantees or collateral.

    How do I apply for an Alternative Small Business Loan?

    You can apply for a small business loan through our lender network by following these steps:

    Step 1 – Apply online in a few minutes: Use our simple online application to submit a request for business funding. If you need any help along the way, give us a call, chat, or email.

    Step 2 – Get expert advice on loan options: An expert, knowledgeable account executive will walk you through all the fine details and requirements. This is to ensure you have all the info you need.

    Step 3 – Finalize your application and get funded: Once your funding has been approved and closed, the lender sends the funds to your account so you can start using them to grow your business.

    Frequently Asked Questions

    Here are the most common questions about why banks are still tightening credit for small businesses.

    Are Banks charging more for Small Business Loans?

    In addition to tightening credit, banks are also raising the costs of small business financing. 10% of banks stated they raised the cost of credit lines. Another 10% stated they increased premiums on riskier loans, per Inc.com.

    Will the Federal Reserve lower interest rates?

    While there was hope that interest rates would decrease at the end of 2023 or the first quarter of 2024, that didn’t happen. It’s difficult to predict if and when it will reverse course and begin lowering rates.

    Much of that decision depends on economic performance in 2024. While some experts say a decrease may be possible by the end of 2024, others say rates might not start coming down until March 2025.

    Are there Small Business Loan options for Bad Credit?

    Despite banks now requiring even better credit for small business loans, credit-challenged business owners still have options thanks to alternative lenders. Many online and fintech lenders specialize in business loans for bad credit. These specialized loans help provide access to funding even if you have a credit score below 600.

    Bad credit business loans through our lender network offer the following features:

    • Funding Amount: $1k – $1 million.
    • Factor Rates: Starting at 1% p/mo.
    • Term: Up to 36 months.
    • Speed: 1-3 business days.

    These loans can help businesses improve their cash flow, invest in growth opportunities, and strengthen their financial position over time. Additionally, by successfully repaying a bad credit business loan, businesses can start to rebuild their credit score and potentially qualify for better financing options in the future.

    However, these loans typically come with higher interest rates, which can significantly increase the overall cost of borrowing. Lenders may require collateral or personal guarantees to secure the loan, putting the borrower at risk of losing valuable assets. Limited loan amounts and shorter repayment terms are also common drawbacks of bad credit business loans, making it challenging for businesses to access the necessary funding for growth and expansion.

    Some small business owners use bad credit business loans as bridge financing until they can qualify for more advantageous options. Exercise caution when pursuing this type of loan. It can provide the necessary funding to support your business, but failing to make payments would make it even more challenging to get financing in the future.

    Banks are Still Tightening Credit for Small Businesses – Final Thoughts

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    The continued trend of banks tightening credit for small businesses poses significant challenges for entrepreneurs seeking financial support. This highlights the importance of exploring alternative funding options and maintaining strong financial health to successfully navigate the current economic landscape.

    Small businesses must adapt to these changes and proactively seek resources to sustain and grow their operations when facing limited credit availability. The businesses that will succeed are the ones willing to take action and find creative funding solutions.

    Contact us if you have more questions or to apply for a small business loan. Our alternative financing experts can help you find the best funding options for your business needs.

    We will help you grow your small business.

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        At UCS, we understand the value of your time and want to ensure that your application has a great chance of approval. Please take note of the following details before applying:
        • To be eligible, it’s necessary to have a business bank account with a well-established U.S. bank such as Chase, Wells Fargo, Bank of America, Citibank, or other major banks. Unfortunately, online-based bank accounts like PayPal, Chime, CashApp, etc., are not permitted.
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