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.
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.