Last week I read an interesting piece Charles Green published on the Coleman Report referencing Pepperdine University’s quarterly Private Capital Access Index for the second quarter of 2013.
The report suggests and Green points out that where many small business owners are looking for capital isn’t where they’re finding it. This is very consistent with what we observe at Lendio. Although where small businesses are looking for financing isn’t much of a surprise, where they’re finding the money they need might be.
Where are they looking?
- 59 percent are looking at the bank
- 57.2 percent turn to business credit cards
- 49.9 percent access their personal credit cards
- 48.4 percent sought out a personal loan
- 44.2 percent went to friends and family
It shouldn’t be a surprise that most small business owners still feel like the local bank is the first stop they should make when looking for a loan. In fact, 63 percent of the survey respondents answered the most likely source of financing would be the bank. However it doesn’t take too many rejections before they turn to other sources like their credit cards or a personal loan—or simply stop looking for financing all together.
You might be interested to know that the successes survey respondents were having fell out in the opposite order when compared to where they were looking:
- 71 percent found success with friends and family
- 58 percent used their personal credit cards
- 57 percent used trade credit
- 54 percent used business credit cards
- 27 percent found success at the bank
With a few exceptions, of which Holladay Bank & Trust is a great example, far too many banks (in my opinion) are moving upstream to bigger businesses and hopefully bigger profits, leaving the small businesses you and I identify with out in the cold. Unfortunately, most small business owners, 63 percent, pin their hopes on a system that is leaving them behind.
I don’t want to see small business lending fall into the same spiral that hit the Savings & Loan industry a few years back. Nevertheless, I don’t believe the needs of most Main Street businesses are met by equity funding or the same machine that funds big business—or even the bigger small businesses funded with the Small Business Administration’s (SBA) 7(a) loan program. I do believe the biggest job creator in the country (small Main Street businesses) deserve more than lip service from the financial industry and maybe even the SBA.
I’m a big fan of making more capital available to Main Street. And, in some instances, a dismal 27 percent of the time, business owners are able to find the funding they need from the local bank. The rest of the time, business owners are either turning to alternative funding sources or have abandoned their search for financing all together. I think the Pepperdine report brings into focus the disparity between many small business owners’ expectations, the banking industry’s claims, and the reality of small business lending.
Granted, alternative financing is more expensive than a traditional loan at the bank. Even though those costs are coming down, non-bank financing still comes at a premium. However many small business owners, when given the choice, will choose expensive financing to no financing. I certainly would have when I was in their shoes. They just need to know it’s available.
I’m not suggesting that alternative financing is the man on the white horse that will save small business—I don’t believe there is such a thing—but I am suggesting that used wisely, and with discretion, alternative financing is a valuable resource for short-term infusions of capital to fuel growth or help a business owner over a cash flow bump.
In a perfect world, this capital might be more easily accessible at the local bank (and banks like Holladay Bank are trying to play that role), but right now alternative sources are filling that niche and the banking industry is losing small business market share which may have significant implications down the road for both borrowers and bankers.
If I could wave my magic wand, I would streamline the process for what is typically referred to as a micro-loan (loans for $50,000 or less), making it less cumbersome and expensive for both banks and borrowers. It’s hard to blame a banker who faces the same costs to initiate a $50,000 loan as a $500,000 loan. I’d likely ignore the small business owners looking for $50,000 or less too.
I think this is a place the SBA could really make a difference. Since 1953, the SBA’s mission has been to “…aid, counsel, assist and protect the interests of small business concerns, to preserve free competitive enterprise and to maintain and strengthen the overall economy of our nation.”
There are those who would argue that the SBA has outlived its usefulness, I’m not one of them. If, as they claim, the bottom line mission of the SBA is to help “Americans start, build and grow businesses,” I think streamlining the process to make smaller small business loans easier and less expensive for SBA banks is a great place for acting Administrator Jeanne Hulit to focus her efforts. When I visit the SBA site I see that they highlight many Main Street business owners, but I’m not sure it’s their focus. When the average SBA 7(a) loan (the most popular SBA program) was for loans of $327,000 in 2012, I’m not convinced the real job creation machine in our country is feeling the love it deserves from the SBA.
63 percent of small business owners looking for a loan are heading to many of the very banks the SBA could encourage with an easier process. As it is right now, “67.7 percent of them expect it will be difficult to raise debt financing in the next six months,” writes Green.