The Irony of Small Banks: Stifling Growth Opportunities for Startups and Growing Businesses

How banks systematically slow down growth in start ups and expanding businesses.

The issue

In the realm of entrepreneurship, startups and burgeoning enterprises often find themselves in a precarious dance between ambition and limitation, investments and liquidity. While the spirit of innovation fuels their endeavors, the harsh reality of accessing capital and financial support can often hinder their growth trajectories.

Small banks, intended to be the lifeblood of local economies and champions of small businesses, often become inadvertent adversaries, systematically robbing these ventures of their growth opportunities through layers of bureaucracy, overly conservative lending practices, and risk aversion.

At the heart of this issue lies a fundamental contradiction. Small businesses, with their agility and potential for disruptive innovation, are often the driving force behind economic growth and job creation. Yet, when they turn to traditional small banks for financial assistance, they are met with a slew of hurdles that impede their progress.

One of the primary obstacles faced by startups and growing businesses is the suffocating burden of bureaucratic red tape.

Small banks, like their larger counterparts, are mired in complex regulatory frameworks and administrative processes. While these measures are intended to safeguard against financial risks, they inadvertently create barriers for smaller enterprises seeking timely access to capital. The cumbersome paperwork and lengthy approval timelines can stifle innovation and dampen the entrepreneurial spirit, leaving promising ventures languishing in limbo.

Furthermore, small banks often exhibit an excessive aversion to risk, preferring to err on the side of caution rather than embrace the potential rewards of investing in innovative startups. This risk-averse mentality manifests in overly stringent lending criteria and a reluctance to extend credit to businesses without a lengthy track record or substantial collateral.

As a result, many promising startups find themselves trapped in a Catch-22 situation: unable to secure funding without a proven track record, yet unable to establish that track record without adequate financial support.

The paradox deepens when one considers the criticism leveled against investors and venture capitalists for their wealth accumulation. Critics often decry the concentration of wealth in the hands of a select few, pointing to the perceived injustices of capitalism. However, it is these very investors who are often willing to take significant risks by injecting capital into fledgling businesses and startups.

The irony is glaring: while some vilify investors for their wealth accumulation, they fail to acknowledge the crucial role these risk-takers play in fostering innovation and driving economic growth. In contrast, small banks, which are supposed to be the bedrock of local economies, often shy away from such risk-taking behavior, inadvertently stifling the very innovation they purport to support.

A few examples from practice and my daily life as an entrepreneur, investor, advisor and lawyer:

A company, which generates a seven-figure turnover and operates in an absolutely crisis-proof sector with secure contracts and a predictable future. Despite offering to assign claims and pledge fixed assets, the bank demanded additional guarantees from all shareholders. What was it about? A short-term increase in liquidity of around 3% of annual turnover to secure a highly attractive contract. The shareholders didn’t want to add more guarantees - which in their situation is completely understandable - and refused. The bank didn't cooperate or negotiate other conditions.

A medium-sized company in the field of power plant construction waited so long for financing approval from the bank, which frequently changed its case officer, repeatedly requested resubmitted documents, and dragged out the process, that some of the suppliers were simply no longer on the market or fully booked for years by the time the funds were finally released after 6 years.

In some countries, state subsidy programs can only be accessed through the house banks. In one case I'm personally involved in, it concerns subsidies in the logistics sector, which can result in reimbursement of up to 50% for certain components. However, the money is only reimbursed after approval of the subsidy. In this particular case, the process has dragged on so long that all eligible investments have practically already been made, and a positive approval would now bring no benefit at all.

I could list dozens more examples of this kind. Dynamic companies are severely disadvantaged in the sluggish world of house banking.

My two cents:

The systemic barriers imposed by (small) banks on startups and growing businesses represent a significant impediment to economic progress and innovation. By embracing a more flexible and forward-thinking approach to lending, small banks have the potential to unleash the full potential of entrepreneurial endeavors and drive meaningful economic growth.

Moreover, it's time to recognize the irony of criticizing wealth accumulation by brave private or corporate investors while simultaneously hindering the very mechanisms that enable it to flourish.

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