Small businesses are having an easier time getting financing, according to results of the Federal Reserve’s 2015 study on small business credit released this afternoon, but it’s still not easy, especially for microbusinesses and startups.
Approval rates were substantially better in 2015 versus 2014: Eighty percent of small businesses that sought financing got it, compared with 65% the previous year. And 45% of those that asked for funds received all the financing they requested, versus 38% the previous year.
That’s a big deal for cash-strapped, growing businesses, and a potentially good sign for the economy. And, in fact, the survey found that not only were approvals up, but so was revenue growth and profitability among the nearly 3,500 employer firms in 26 states the Fed surveyed. "Our respondents did seem to have much more positive outcomes, and I think some of it may stem from applicant quality," says Ann Marie Wiersch, a senior policy analyst at the Federal Reserve Bank of Cleveland. "This is not a random sample survey, but it does suggest that conditions have improved for small businesses."
In fact, beyond this survey, data shows that small-business lending has been improving over time, but has yet to return to its peak. "Bank lending did decline sharply, and it has been steadily climbing back, but we're not back to pre-recession levels," Wiersch says.
In the survey, some firms still had a tough time getting financing, and that was especially true for the smallest of the small. Overall, half of firms that applied for financing reported receiving less than half the funds they asked for, leaving them with substantial shortfalls to cover operating expenses or fund expansion plans. Microbusinesses (with revenues less than $100,000) had the greatest unmet financing needs, with 63% reporting shortfalls, followed by startups (in business two years or less) with 58% reporting shortfalls.
Despite the hooplah around alternative lenders, small businesses were still predominantly turning to banks for their financing needs. More than 90% of loan applicants went to banks, compared with 20% that applied to online lenders, including Lending Club, OnDeck, CAN Capital and PayPal Working Capital. (The numbers don't add up to 100% because some businesses applied to multiple places.) However, in places where banks are still turning away large numbers of small business loan applicants, online lenders were filling the funding gap. In Florida, for example, which reported much lower approval rates, below 50% at both small and large banks, 35% turned to online lenders versus 20% for the survey as a whole, Wiersch says.
Overall, those that got approved by banks were happier than those that turned to online lenders. Three-quarters of those approved by small banks said they were satisfied, versus just 15% of those who went to online lenders. The biggest complaints for the latter, in order of troublesomeness: High interest rates, unfavorable repayment terms and lack of transparency.
With so few significant, unbiased sources of information on small business credit, the Fed survey, a joint effort of the Federal Reserve Banks of Atlanta, Boston, Cleveland, New York, Philadelphia, Richmond and St. Louis, is a big deal. Stay tuned for further data on non-employer firms.
