How easy is it for SMEs to get Business Loans from Commercial Banks?

Commercial banks hate giving business loans to small businesses. Indeed, it’s almost impossible for a start-ups and micro businesses to get funded by commercial banks. That’s because banks avoid giving money to what they perceive as ‘risky’ business…

How so? Dr. Paul Smith, Lead Researcher of the “Inaugural South African SMME Access to Finance Report 2017”, found that startups and micro businesses are the most undeserved in the formal business market and therefore represent the largest funding gap.

Start-ups and small businesses mostly do not need large amounts of money to get their business going. Sadly, this may be a major obstacle for them to get funded…

In fact, according to Dr. Smith’s report, is the appetite of funders to loan smaller amounts significantly less than the appetite for them to approve larger loan sizes. Yet 44% of the total SMEs funding requests are for amounts less than R250 000. As a result, whilst many funders claim to offer funding for requests under R1 million, most SMEs battle to raise funding in this range Dr. Smith concludes.

So, what can SMEs do to get business loans from commercial banks?

Getting business loans from commercial banks

Before even trying to get business loans from commercial banks, SMEs should first understand how and where the banks make their money. One thing is for sure – bankers won’t necessarily be so excited and emotional as you about your dream business. After all, they make their money by charging interest. They’re not eager risk-takers and you’ll need to offer them substantial collateral before they even will consider giving you a business loan.

However, there is some respite for SMEs. Indeed, according to Haron, Said, Jayaraman, and Ismail (2013), the following factors may play an influencing role when banks decide to give business loans (or not):

Management/ Character

Here character refers to the probability in fulfilling and honoring obligations by the SMEs. Character/management plays a significant role on the probability of loans approved by credit officers.


Capacity refers to the ability of the business to repay the loan. There’s evidence to show that financial capacity of the borrower does affect the loan assessment by the financial institutions in making decision for the loan approval.


Collateral is the security or guarantee that a SME owner provide for the loan borrowed. Collateral also may be used to lessen some of the moral hazard related monitoring issues in business lending.

Maybe a great business plan will to the trick?

Will great business plans help SMEs to get business loans from commercial banks?

But what about your business plan? After all, you’ve spend many hours writing it and much more time researching your business idea and market. Surely, if you believe so strongly in your business, why also not the funders?

Of course commercial banks will require you to summit a detailed business plan when applying for a business loan. That’s not just any business plan! The plan should speak the language of the banker and tell her what she wants to hear…

A business plan to get business loans from commercial banks

The first thing to decide on before starting your business plan is what the reader needs to know. In each business plan you write, you should emphasize the figures that are important to the banker says Joseph R. Mancuso in “How to Get a Business Loan”.

Joseph notes that bankers are looking for the following in business plans from SMEs:

  1. A banker needs to know about the collateral. She wants to know how the loan is going to be repaid.
  2. Bankers love to run ratio analyses. They look at changes in various ratios over time.
  3. Bankers want to see a full personal financial statement. What assets do you own and what are your liabilities?

Additionally, Michelle Black in says business plans to obtain business loans should also contain:

  • A sound description of what your business. What it does, who it serves, and how you stand out among the competition in your industry.
  • Short and long-term goals. What goals have you set for your company in terms of annual revenue and profit?
  • How much financing you need to reach your goals? How will you invest the money you borrowed to help your company to succeed?

Apart from a sound business plan, the banker needs supporting documents and statements…

Supporting documents and statements banks need to decide on SMEs business loans

Most commercial banks that offer business loans to SMEs may require the following documents from you:

  • Tax returns (business and personal, generally for the past 1-2 years)
  • Bank statements (business and personal, generally for the past 6-12 months)
  • Profit and loss statements
  • Existing business debts
  • Incorporation paperwork
  • Business licenses and permits
  • Proof of collateral


The commercial bank that we grew up with and that we trust will probably be the first source of funding that we’ll think of when we start business. However, your friendly banker may change in a nasty inquisitive character once you share your business plan with her. The bottom line is that your banker will demand collateral for every cent that you want to start your business. If you’re prepared to cede everything you own to the bank to start your business – well then you’ve got one hell ‘of a business going…

Luckily are commercial banks not the only funders of SMEs. In a future post I’ll tell you more about getting funds from venture capitalists…

Read more: Borrowing Money from a Bank to Start your Business

A well-researched and written Business Plan helps to get your business started the right way.


Haron, H., Said, S.B., Jayaraman, K. and Ismail, I. 2013. Factors influencing small medium enterprises (SMES) in obtaining loan, International Journal of Business and Social Science, 4(15).

Mancuso, J.R. 2010. How to Get a Business Loan, Simon and Schuster.



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