Introduction to Finance

LEARNING ACTIVITY
1. Examine bank websites and learn about their off erings to small and medium busi-
nesses and large corporations. Include in your search, the websites of local banks 
as well as large banks, such as http://www.jpmorganchase.com and http://www.
bankofamerica.com. 
2. Learn about fi nancing opportunities for small businesses through the U.S. Small 
Business Administration at www.sba.gov.
3. http://www.crowdsourcing.org, http://crowdfundingprofessional.org and http://
www.cfi ra.org are industry sites dealing with crowdfunding news and events.
Bank Financing for Small Businesses
Getting a small business bank loan is much harder than it was 
in the 1980s. Bankers are making greater demands on entrepre-
neurial or venture fi rms. More comprehensive fi nancial statements 
must be provided and more collateral, such as equipment or work-
ing capital in the form of inventories or receivables, pledged. 
Banks lend at the “prime rate,” which is their best rate, to larger 
businesses. In contrast, small businesses are asked to pay two or 
more points above prime. For example, if the prime rate is 8 per-
cent, small businesses will have to pay interest rates of 10 percent 
or more to obtain bank loans.
Iris Lorenz-Fife, in her book 
Financing Your Business 
(Pren-
tice Hall, 1997), lists the fi ve most common reasons given by 
bankers when they decide not to make loans to small businesses. 
The fi rst reason is the “owner’s equity is too low relative to the 
size of the loan that is requested.” The second reason relates to 
the “value of the collateral being off ered is too low or unreliable.” 
A third reason is that the “fi rm is a one-person business with no 
adequate managerial backup.” A fourth reason centers on the belief 
that the business “will need more time to repay the loan than the 
bank’s usual terms.” The fi fth reason for rejecting a loan application 
from a small business is that the banker believes the small business 
owner/manager “has inadequate managerial experience or ability.”
If you have a small business loan application rejected by a 
bank, you should ask the banker why it was rejected and ask what 
changes in the application would be necessary to successfully 
obtaining a bank loan.