Small businesses have a multitude of options when they need external financing. There are the traditional routes, like small business bank loans, and then there are the alternative and online lending sources. On top of that, small businesses are commonly using personal means – friends and family or personal credit cards – to support their enterprises.
On top of these options, small businesses also have an array of motivations behind why they're seeking financing in the first place. Some need working capital to grow; others are bracing for working capital fluctuations or economic uncertainty.
A new report by Pepperdine University and Dun & Bradstreet takes a look at how, and why, small businesses are seeking capital, and finds that while entrepreneurs are sure that their businesses will grow, the way they access loans and other types of financing is a much less clear picture.
Demand For External Financing
For small and midsized businesses, the demand for financing stems from these companies' plans for future growth or expansion, with more than 56 percent of SMEs citing this reason. Working capital fluctuations and the need to grow as a result of increasing demand were also top motivators behind seeking external financing, researchers said.
Adding to the evidence that the U.S. currently offers a positive climate of growth for small businesses, the majority of SMEs surveyed said they operated with a profit in the last quarter.
But the news isn't all positive. According to Pepperdine and Dun & Bradstreet, nearly one-third of small companies said they are seeking access because of worsening operating conditions.
Further, small business owners feel that their need to grow is not met by lenders. According to the report, more than half of small businesses said the current financing environment restricts growth opportunities; 45 percent said it restricts their ability to expand staff.
And while small businesses that seek finance are largely doing so because they're growing, 42 percent of small firms said they did not seek credit in the most recent quarter.
Sources of External Financing
Banks are, by and large, the most common source for financing for SMEs surveyed by Pepperdine and Dun & Bradstreet. According to the data, large and community banks accounted for 30 percent of the sources of financing for small businesses in the last quarter.
Online lenders took up just 3 percent of the market share among borrowing small businesses. Even friends and family surpassed small business lending levels of online lenders, with 6 percent citing friends and family as their primary source of funding in the last quarter.
The most common reason these companies choose these funding sources? Nearly half of small businesses (45 percent) said it was because they could qualify for it. More than one-third chose their funding source because it had a reasonable interest rate.
Nearly one-fifth (18 percent) chose their funding source because they couldn't qualify for any other.
Ease Of Access To Financing
For all of those small businesses expecting to grow, there are an array of challenges companies expressed to researchers, too.
For instance, for small businesses, the most common challenge in the most recent quarter was uneven cash flow, with 17 percent citing this obstacle. Taxes, increased costs of running the business, and a lack of credit availability were each cited by 10 percent of small firms.
Pepperdine and Dun & Bradstreet took a closer look at the challenge SMEs face when seeking capital and found that 61 percent of small firms agree that accessing equity financing is difficult; 59 percent agreed that raising debt financing is also a struggle.
Friends and family, unsurprisingly, account for one of the most successful sources of funding for small firms, but the success rate is surpassed by credit cards, both personal and business. Nearly half of small businesses are also enjoying high success rates by taking out personal loans, suggesting small firms are likely guided toward taking out personal debt – personal cards, loans and relatives – to finance their companies.
Trade credit saw a 57 percent success rate with small businesses in the last quarter; merchant cash advances saw a 41 percent success rate, while business bank loans received a 38 percent success rate.
And while 40 percent of small firms said they had considered a Small Business Administration loan, just 1 percent said they actually received this kind of financing.
The research from Pepperdine University and Dun & Bradstreet reveals a complicated, sometimes contradictory picture for small firms' access to finance. While SMEs are eyeing growth, they face challenges when seeking external financing and often turn to personal debts – personal loans, cards, and friends and family – to support that projected growth.
Over the next six months, only 28 percent of small businesses said they plan to raise financing.These companies predict that future growth and working capital fluctuations will be their biggest motivators behind accessing financing this year.
For those companies not planning on accessing financing, small firms largely feel secure about their future financial performance: 65 percent said they have enough cash flow, and 32 percent said they have enough financing in place to not need to take out a loan.
Overall, 83 percent of small firms said they are either extremely or somewhat confident that they will see their businesses grow in 2016. Whether external financing will help that growth – and how – is a far less certain picture.
According to Dun & Bradstreet vice chairman Jeff Stibel, the picture of small business financing has certainly changed over the last four years, when the first study of this kind was completed.
"Since then, we have seen steady progress for small businesses being able to acquire the capital they need," he said in a statement, "although the financing is still predominately not coming through traditional lenders."