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The Cautious Optimism of SME Finance in 2015

The Thomson Reuters/PayNet Small Business Lending Index released the state of SME finance for February 2015 this week, and the results were promising. According to the Index, borrowing among small businesses in the U.S. rose by 7 percent from the same time a year ago. The February Index score, however, dropped slightly to 119.2 from 122.4 in January, though reports note that the trend was unsurprising considering the poor weather experienced by the country.

Still, that 7 percent increase suggests the financial health of SMBs is steadily improving. “It tells us that these businesses are investing because they are getting more orders and more purchases from their customers,” said PayNet President Bill Phelan. A significant increase in lending – as opposed to just a 1 or 2 percent increase, which would suggest SMEs are taking out new loans to replace old ones – reveals that productivity in the U.S. is on the rise.

The release of Thomson Reuters and PayNet’s SME lending index report for February 2015 coincided with a new report on the state of small business finance for 2015, published by small business crowdfunding platform TradeUp.

2015 State of SME Finance in the United States” reflects the increasing optimism among small businesses in the nation, which found greater access to working capital in 2014. Even if the accessibility of small business loans is not where it was at before the recession, TradeUp said, small business owners are borrowing more and venture capitalists are investing more to increase SMEs’ working capital.

The research, done in partnership with Nextrade Group, reveals key insights into the current financing environment for small businesses, across the spectrum of lenders from big banks to alternative sources of capital.

Cautious Optimism

The outlook for small businesses this year is “cautious optimism,” TradeUp reported. Following the 2008-09 financial crisis, credit was in short supply for SMEs, and stricter regulations tightened SMEs’ purse strings even further.

While still not at levels seen prior to the Great Recession, TradeUp found positive signs of growth among SMEs in 2014. As of December 2014, loan balances stood at $302.6 billion for small businesses. That figure is $34 billion less than what was seen in June 2008, but the volume of SME loans has been growing steadily since about 2011.

Mainstream banks have always been a primary source for small business loans, though in the wake of the financial crisis, they severely cut back on their loan approval rates. Today, however, the Federal Reserve Board of Governors found that banks perceive the lending conditions for small business as having improved as of January 2015 compared with early 2015.

Similarly, the Federal Reserve Board of New York found that small businesses themselves are feeling more positive about loan accessibility. More SMEs found credit “sufficient” in 2014 compared with the year prior, and fewer felt discouraged about accessing credit. Likewise, Wells Fargo and Gallup released their quarterly survey of SMEs last January, finding that optimism among small businesses in obtaining credit rose by 4 percent compared with November 2014. Still, research shows that the majority of small business owners find it difficult to obtain a small business loan.

The State of Alternative Lenders

TradeUp’s research focused largely on the rise of alternative financers and how their presence in the market impacts SMEs’ access to loans and perceptions of the ease of accessing credit. According to the study, 2014 saw more than $8.6 billion loans to small businesses sourced from online lending platforms – that, TradeUp said, is more than all previous years’ numbers combined. With the December 2014 IPOs of Dealstruck and OnDeck, other alternative lending services have popped up in hopes of achieving similar success.

Recent years have also seen the entrance of existing financial service and commerce firms like PayPal enter the small business lending market; Google, too, reportedly plans to enter the industry, TradeUp noted.

“As traditional sources of small business credit have failed to meet the demand, a vibrant market of online lending platforms has sprung up,” the report said. “These platforms offer speed and higher odds of success than traditional lenders, using proprietary analytics to approve some 60 percent of the loan applications they receive, typically within a few days.” Despite the rise of this market and the booming interest among investors, LendUp added, neither Dealstruck of OnDeck have turned a profit as of 2014’s third quarter. “Though offering many more alternatives to small businesses to raise capital, online lenders are by some feared to created the next subprime lending crisis.”

Crowdfunding has also been on the minds of financial analysts and business owners as of late. While data is scarce for the relatively new industry, experts estimate crowdfunding to have become a $10 billion industry in 2014, up from $1 billion in 2010. With recent crowdfunding efforts paying attention to rising small business capital, several SME crowdfunding platforms have stepped onto the scene. The passage of the JOBS Act, LendUp added, has only helped fuel crowdfunding into the minds of small business owners looking for funding.

New Ways To Access Cash

In addition to online lending platforms, supply chain financing and venture capitalists have both emerged as crucial sources for small businesses to obtain working capital. Federal efforts to boost supply chain financing initiatives, and startups that provide multi-bank financing options are working to cover outstanding invoices to keep small businesses afloat.

In 2014, venture capital in the U.S. hit its highest peak since 2000, TradeUp said, hitting $48 billion. Angel investors, too, are making an impact in the SME credit gap. According to the research, more than 30,000 small businesses received funds from angel investors in the first half of 2014 – a 5.8 increase from the same period the year prior. The number of active angel investors in early 2014 was on the up, too.

The rise in venture capitalists and angel investors is certainly a positive for U.S. SMEs, but TradeUp highlights that the two investor groups have recently shied away from funding startups and providing seed funding. According to TradeUp, only 38 percent of angel investors provided seed funding in the first half of 2013. Instead, investors have been more interested in growth capital financings, the report revealed.

Not A Boom, Not A Bust

The data pouring in not only reveals the state of small businesses’ access to loans, but offers insight into the rise of alternative lenders and the health of the U.S. economy overall. “Small and medium-sized enterprises…are the backbone of the U.S. economy,” LendUp said. According to reports, SMEs account for nearly half of the nation’s GDP.

But this data also reveals why, as LendUp described, the market’s optimism must be “cautious.” Crowdfunding platforms and other online lending platforms, federal regulations promoting small business lending and supply chain finance, and the stable lending to SMEs among big banks is all great news for small businesses. However, as the research shows, small business lending has not yet reached levels seen before the financial crisis. And despite the explosion of alternative lenders emerging in the market, it is too early to tell whether these new firms will become successful in the long term.

Still, the rise in SME lending is undoubtedly a good sign. “While not in a boom phase, small business credit shows a solid increase that is in keeping with an expanding economy,” PayNet’s Phelan said. “Small businesses are finding increased demand from consumers and businesses to buy more of their goods. When small businesses are investing, the current business cycle continues to expand.”



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