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Eager to Expand, But Money’s Tight

A survey of some 2,000 small businesses shows it’s still not easy for Main Street companies to borrow these days.

At a time when many say businesses are gaining strength and the credit environment is improving, a recent report reveals that small businesses still face an uphill climb to secure credit—and often go empty-handed.

Forty-four percent of respondents said in the first half of 2014 they got none of the financing they sought, and a majority (55%) of those who failed to secure any financing said they planned to try again in the subsequent 12 months.

The top reason businesses wanted financing? To fund expansion of their business. And when they can’t get the money they need to do that, it can have economic implications.

Inna Kinney, founder and CEO of ECDI, which provides loans and technical assistance to small businesses in all 88 counties in Ohio, agrees.

“Our data show that for every startup business that we invest in, there’s a minimum of two to three jobs being created,” she said. “If small businesses don’t have access to funding, to capital, what is the result? They don’t have enough working capital, and if they cannot fulfill demands of the business or of customers, they may let someone go.”

The Small Business Credit Survey, conducted across 10 states by the Federal Reserve Banks in Cleveland, Philadelphia, New York, and Atlanta, also found that two-thirds of businesses walked away with less financing than they wanted.

It’s anecdotal, but we are hearing that some banks are saying that small business lending is not all that profitable. Part of this stems from the fact that other types of loans—mortgages for example—can be pretty easily automated. Small business lending can take many different forms (SBA loan, asset-based, lines of credit, etc.), plus the terms and collateral vary from one deal to the next, so it’s very difficult to automate this process. Therefore, it’s more expensive to do this kind of lending.

The number of businesses reporting that they had applied for credit from an online lender was surprising. Eighteen percent of the approximately 2,000 respondents said they’d done so. Previous surveys, while not altogether comparable, have indicated very little activity with online lenders. For example, a 2013 New York Fed survey asked small business owners about their primary source of funding, and almost none of the respondents cited an online lender. The response we found could indicate that awareness of these online alternative lenders is rising and that business owners are increasingly open to and searching for new sources of credit.

The other result I found interesting was the variation between the responses given in different states. For example, when asked about their top business challenge, 23% of Pennsylvania businesses replied, “lack of credit availability,” compared to only 9% of Ohio businesses. I was surprised by how different two adjacent states could be, especially since the mix of industry in the two is not all that different.

Bottom line: Small businesses, especially the newest and smallest of firms, still face challenges in accessing credit. Their struggle can have real implications for both the firms themselves and for economic growth.


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