Small Business Loans: Small Banks vs. Large Banks

28 August 2012

Small and medium enterprises will begin to drive economic growth in the UK during the next ten years, according to the Department for Business, Innovation and Skills. This contrasts sharply with the 20th century, in which large corporations were the main drivers of economic growth. SMEs that use new technologies such as communications and computers are especially likely to drive the economy in their sector. Small businesses are generally more dependent on loans than larger corporations, which affects the way in which banks treat them. The size of a bank has a direct effect on the loans that is approves.


The British Bankers Association identified key areas in 2010 that will allow banks of all sizes to provide better support for SMEs. Banks should work with business groups to support business mentors. They also need to improve service levels to SMEs, especially those with less than 10 employees.

Banks need to establish a transparent appeals process that allows businesses to know why a loan application was declined. Refinancing dialogues should begin one year before the end of the current loan to ensure business owners know what they need to do for successful refinancing. Banks also need to provide helpful advice and information when a loan application is declined.


Banks are granting fewer loans in the aftermath of the credit crisis, which lasted from 2008 to 2012. This is especially detrimental to SMEs that rely on financial backing to get off the ground. Smaller banks are typically more likely to grant loans to entrepreneurs, which typically carry a higher level of risk. This has caused a trend towards small banks in the issuance of loans, especially for SMEs.


Small banks are also more likely than large banks to grant loans to SMEs in their community. These banks control a minority of all banking assets, but they account for the majority of loans to SMEs according to the BIS. This trend has continued throughout the most recent credit crisis.


The amount of human interaction is typically greater at a small bank. This type of bank is more likely to be based in the same neighborhood as the businesses it serves, and has a vested interest in helping local businesses to thrive. SMEs often develop a lasting relationship with a small bank that is beneficial to both parties.

Interest Rates

Large banks in the UK have refined their services to the point that they are quite similar except for the interest rates. This is the primary reason why these banks have ceased to advertise their preferred rates, as it allows them to charge a higher interest rate to the majority of their customers. This is particularly significant for SMEs, since they do not often qualify for a bank’s preferred rate. A larger bank typically offers lower interest rates than smaller banks when all other factors are equal.


Large bank have a greater degree of bureaucracy and they often have greater restrictions on the types of businesses to which they can grant loans. This can prevent SMEs that are not in a standard industry from getting a loan from a large bank. Online businesses can have particular difficulty in meeting the loan criteria of a larger bank since they don’t fit into a traditional slot. Smaller banks often allow a human being to make exceptions to their standard criteria. Owners of SMEs may also use a smaller bank for their own financial needs, especially since these banks are more likely to provide personal banking services online.

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