How are Banks Harming Small Businesses?

As much as 78 percent of small businesses report positive corporate profitability, rating their happiness level to 8, on average (from a scale of 1-10). The past couple of years seem like the ‘golden’ years for small businesses, thanks to the increasing consumer demand, innovation, and technology – great possibilities and opportunities are present in the business sector.

But while big brands thrive, many small businesses suffer. Why?

Apparently, too much regulation by governments is interfering with the free market, which greatly affect the health of small businesses.

Rigid policies and regulations make sourcing capital difficult.

If you tried your luck of borrowing money from your bank and got turned down, you’re not alone. Only one in five business loans are approved by traditional banks.

Why? Banking policies say so. Let’s talk about Basel III as an example. This law is a set of banking regulations that place stricter standards on the quantity and quality of capital that banks must hold.

What does this mean for small businesses? Many experts believe that Basel III reduces credit availability for small enterprises. This means that bank loans will get more expensive and thus, far more difficult for many businesses to obtain.

Banks’ supreme power over loan contracts.

Take a look at any bank loan contract and you will know – banks hate young entrepreneurs. What most small business owners think is that as long as they are keeping up with their payments, they won’t be in trouble.

Unfortunately, this isn’t the case. The standard business loan contract gives banks an inordinate level of power over the borrower, without the latter knowing about it. For example, banks have the power to call in a loan and demand for payments in an unrealistic time frame. They may also perform a new valuation of assets securing the loan. And if the value has gotten down, the borrower faces potentially unmanageable loan costs.

Federal regulations hurt small businesses.

Small businesses are the heart of America’s economy. 45% of the U.S. gross domestic product is driven by small enterprises. But despite their prevalence, federal regulations and their infrastructure have a disproportionate impact on the free enterprise in America, especially on small businesses. Such regulations alone are estimated to cost small businesses as much as $1.9 trillion a year in direct costs, productivity loss, and higher prices.

The federal tax code, for example, adds additional burden to small businesses more than the amount of money they have to pay. It’s not just business taxes they have to deal with. Payroll taxes are a hassle as well. One-third of small businesses spend 80 hours per year on federal taxes and nearly half spend $5,000 on accountants and tax practitioners.

Another law – the Affordable Care Act (also called Obamacare), brought so many data collection and reporting requirements from small businesses. To comply with the new law, employers need to invest so much time, people, and in some cases, complex IT infrastructure – something that small organizations cannot afford.

Outdated banking technology hinders growth.

While the rest of the world is keeping up with the latest technology, banks don’t. That’s despite having the money and resources to do so. You won’t believe it but most of them still use the technology from the 1970s, a sad reality that causes a greater burden to small businesses.

For instance, it’s far easier and faster for companies to pay their suppliers in person than send a request for a bank wire transfer. If entrepreneurs need to get an update about their loans, they have to call the bank (worse, go there personally). There’s lack of transparency as to how much of the repayment has been deducted from the actual loan and how much went to the interest.

Another issue with banks concerns accepting international payments. More and more small businesses are entering the global market. Unfortunately, bank limitations are always challenging. It’s funny how consumers can easily track their $5 payment but small businesses could not trace their $10,000 supplier payment.


Banking laws and government regulations are hurting small businesses in so many ways because of rigid policies and practices, lack of transparency, and the use of outdated technology. Because banks take full control over contracts (from loans to other financial services), entrepreneurs are often left in the dark. Additionally, many federal regulations, such as the federal tax code, cost small enterprises due to its complexities.

Will the situation ever change? Not until the government make their policies fair and less rigid for small businesses.

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