"Why can't I get a loan?" - Making Sense of Elusive Bank Loans for Small Businesses
Updated: Aug 25, 2021
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Where have the loans for our small businesses gone?
I recently sat down with Tim Russell, the founder of Maggie’s Farm, an award-winning rum distillery located in Pittsburgh’s trendy Strip District. We met at his distillery, a hip, raw post-industrial space that houses both rum production and a bar where patrons can imbibe hand-crafted cocktails that showcase their rum and an impressive local beer list.
Tim, a craft beer veteran, started Maggie’s Rum four years ago and since then the team has grown the business by about 50% each year, pumping nearly all profits back into the business to continue to grow and expand.
Tim inspecting a still at Maggie’s Farm.
If you’re anything like me, you might be thinking that banks would be knocking down the door to get Maggie’s Farm as a customer.
Well, unfortunately that just hasn’t been the case. In fact, in four separate attempts over the past four years, Maggie’s Farm has been denied for a loan. To make matters worse, each time they applied, Tim and his team were strung along for weeks of meetings and paperwork before ultimately being denied - wasting his precious time and slowing his company’s growth.
So, how is it that a profitable company, with oodles of precious inventory, a killer business plan, and a highly creditworthy founder couldn’t get access to a bank loan? Maggie's Farm isn't the only one: many small business owners face challenges in finding loans from banks to finance their growth. Here are a few thoughts:
Their business is in an unfamiliar industry to bank lenders
One of the reasons that Maggie’s Farm has been so successful is that they were the first rum distillery in the Commonwealth of Pennsylvania. While consumers seem to be thrilled with this, banks were scared. You can just imagine a room full of bankers in an underwriting committee saying, "We’ve never lent money to a rum distillery before, this seems too risky.” All of this while the customers keep buying and loving the product. This could also be the case for investors who might be interested in supporting a distillery, but wary of the untested market for the product.
The small business owner wants to limit personal collateral
Business owners pour their heart and soul into their businesses and often that means contributing their personal wealth, too. Tim has worked hard to maintain a nearly perfect personal credit score, but since most of his personal wealth went into Maggie’s Farm, he doesn’t have many other personal assets for the bank to claim as collateral. This is no small change, as on average a distillery can cost from $200,000 to millions of dollars to start up. Tim’s financial commitment to Maggie’s Farm should be celebrated, but instead banks say he lacks personal assets to collateralize.
The business is seeking out a relatively small loan size
Most of Tim’s loan requests were fairly modest, each less than $100,000. You might think that this is a positive for Maggie’s Farm since banks are so risk-averse. However, banks make more profits on larger loans than on smaller loans so there is an increasing trend across the country that banks are unwilling to do small business loans under $100,000 and in some cases, under $250,000. On top of that, small business lending from banks has plummeted in recent years, with 70% of banks tightening their lending criteria, meaning more and more small businesses are left in the lurch.
The small business has been operating for only a short time
Banks love to see businesses with a long operating history. Even as more small businesses appear year after year, banks still refuse to lend to these new businesses if they don't consider them to be established enough. The irony is that by ignoring businesses with shorter operating histories, banks are preventing more businesses from becoming successful and ultimately achieving a long, healthy operating history. After celebrating its 4-year anniversary, this is less of an issue for Maggie’s Farm, but it still prevents millions of successful small businesses from getting the expansion loans they need to grow.
Banks don't see the loyal customers flocking to the business
Rum distillation is naturally an asset-intensive process. Maggie’s Farm has several large, beautiful stills, rum aging in barrels, and various other equipment in the facility. But banks have failed to capture the single largest asset - the business’s loyal customers. Don’t take my word for it, just check out their Yelp reviews or their Facebook following, people love this place and keep coming back for more!
We should also add that this relationship with the community is an incredibly valuable asset for another kind of small business lending - regulation crowdfunding! Having a strong base of customers in your crowd willing to invest in you can mean wonders for raising a small business loan that you pay back to them, not a bank!
Find fair small business loans from your neighbors
Businesses like Maggie’s Farm make our communities more vibrant, fun, and livable. It’s disheartening that banks are neglecting them. Honeycomb Credit works to bridge the gap that many small business owners find in seeking out funding for their growth projects through crowdfunded business loans.
Find out more about Honeycomb's crowdfunded small business loans, and fill out the form below to receive more information!
George Cook is the Co-Founder and CEO of Honeycomb. As a sixth-generation community banker, George is passionate about the positive impact that local lending can have on communities. When he’s not trying to fix the U.S. financial services system, George can be found exploring the wonderful neighborhoods and small businesses of Pittsburgh with his wife, Elizabeth.