America’s 30 million small businesses and 200,000 middle market firms are the heartbeat of the US economy. Together they generate 75 percent of new jobs and 50 percent of the nation’s revenue. They are a barometer of our nation’s prosperity. These organizations are run by people that have sacrificed weekends year after year, worked through vacations and holidays, missed school plays and cancelled anniversary meals. Most of them have made personal financial investments to secure a successful future for their business. For many, it’s finally paying off. According to the Q42018 Vistage CEO Index, 70 percent of SMBs are expecting increased revenues; 65 percent are expanding their workforce and 61 percent are expecting profit growth. 43 percent of businesses surveyed for the most recent National Center for Middle Market Indicator are planning to increase investment in capital expenditures for their business.
But there’s a stumbling block, which presents a continuing threat to this buoyant market. SMBs are finding it increasingly hard to secure funding, to take their next steps towards progressing sustainable growth. This funding isn’t necessarily for big ticket items, but for critical assets to grow and expand their businesses. They need capital for equipment, software or inventory. They need access to funds to give their business a professional look, offer a better customer experience, digitalize their operations and gain a competitive edge. Without financing, they risk being left behind.
Applying for loans is labor-intensive and complex: author Brayden McCarthy cites a study which found the average small business owner needs to approach multiple banks and spend about three to four full days of filling out applications before they can find a bank willing to lend to them.
Decline in community banks – SMBs’ lifeline for loans
It’s an inhospitable environment for SMBs trying to secure bank loans. The numbers, quite literally, don’t add up: while more SMBs seek financing to grow their business further, the number of banks willing to lend to them is in decline. Fewer banks exist to process loan applications - banks in the US are closing branches at record levels, a result of consolidation, demand for digital and spiraling overheads.
According to the FDIC, there has been a 79% drop in banks with less than $100M in assets from 1998 to 2018. The number of community banks has declined by more than 11,000 over the past 30 years. Some are closing branches in rural locations and others are closing down altogether.
Banks are less willing to lend to SMBs
Added to this is financial institutions’ reluctance to lend capital to smaller organizations: banks are still feeling the jitters despite the last major financial crisis in the US being a decade ago, so they are constrained in their lending. Small business loans now represent under 30 percent of total bank loans. The FDIC reports 10 consecutive quarters of decline in small business lending. Conversely, Commercial and Industrial (C&I) loans have seen growth. These are the larger loans, more profitable for financial institutions.
For banks, it doesn’t make financial sense to process smaller loans – the cost to process a loan of, for example, $100,000 is generally the same as the cost to process a loan of $10,000. They’re also operating within tighter regulatory environments than ever before and are more accountable for their clients’ operations. This makes them more risk-averse and pulls their purse-strings even tighter. A report from Harvard Business School notes that,
Competition between banks for small business loans is falling, finds the report, making it harder for SMBs to shop around and get the best rates.
The resulting action of this inaccessibility to capital is that small businesses will turn to high interest credit cards, personal savings and crowdfunding to finance their organisations. These financing options bring with them high levels of risk and a huge financial cost - to the individual, to the business, and to the economy. We need small businesses to thrive, to generate long-term, sustainable growth. A lack of access to easily-available funds will hinder their potential and impede our country’s prosperity.
But there are alternatives. Challenger brands – less risk-averse alternative lenders - are coming into the market. Fast-growing independent financial companies are emerging on the side of SMBs. The consumer boom in leasing automobiles will spread into SMB finance, for whom leasing provides fast, low-risk cost-effective access to capital. It’s clear that SMBs struggling to obtain funds must look beyond traditional routes to finance. There are options out there - they just need to know where to look.