Why Banks Perceive the Financial Risk to Be Greater Among Small Businesses

Traditionally, banks have viewed small business loans as some of the riskiest. The 2018 credit crisis prompted banks to cut their riskiest loans and led to a 30 percent decrease in the amount of government-backed business loans compared to 2007, according to CNN. Much of the hesitation to lend to small businesses comes from the historical rates on small business failure.

Time Frame

The older a small business gets the less likely it is to fail. Young companies, however, have inadequate financial information to judge the health of the company until the two- or three-year mark. Even if the company has a solid business plan, most banks do not want their money tied up in a new venture that could fail in months.


Small businesses have high failure rates in two key areas: loan defaults and company success. According to CNN, in 2009, U.S. Small Business Administration loans had an 11.9 percent default rate. Historically, small business loans have had a default rate of 0 to 28 percent, depending on the location of the business and the state of the economy.

Failure Rates

The actual failure rate of the average small business is unknown, but business consultants usually consider 33 percent a close approximation, according to Gaebler.com, a website focused on small businesses. This failure rate goes up to 66 percent for companies younger than 2 years old, based on U.S. SBA statistics.


The government created the Small Business Administration in 1953 to help small businesses grow and get advice, according to the SBA website. The SBA also backs loans made by commercial lenders to entice them to lend. The guaranteed portion of SBA loans varies from year to year, but the SBA backs at least 75 percent of loans by approved institutions and this often goes up during recessions


Banks want an applicant to have a credit score above 700 and collateral to secure at least 10 to 20 percent of the loan and a solid business plan, according to William C. Deegan of the State University of West Georgia. New businesses should have a plan to get positive cash flow within six months, while existing companies need records that prove the company can afford loan payments.



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