Demand for small business loans with bad credit and fast business loans are driving online lending as business owners seek capital from sources other than banks and credit card companies. A recent study of firms commissioned by the Federal Reserve provides useful insight into the small business credit market for businesses with fewer than five hundred employees in ten states included in the study: Alabama, Connecticut, Florida, Georgia, Louisiana, New Jersey, New York, Ohio, Pennsylvania, and Tennessee.
Some key findings from the Small Business Credit Survey (SBCS) include:
There are large disparities in credit demand between small and larger firms (based on revenue).
- While twenty-two percent of firms reported applying for credit in the first six months of 2014, results show considerably weaker demand among firms with less than $1 million in annual revenues.
- Only eighteen percent of microbusinesses (under $250,000 in annual revenues) applied for credit. By contrast, over 30 percent of small ($250,000 –$1 million) and mid-size firms ($1–$10 million) and 58 percent of commercial firms (greater than $10 million) applied for credit.
The applicant pool is strong; loan applicants tend to have prior borrowing experience and are growing.
- Applicants are more likely to be larger firms (in terms of employees), firms with revenue growth in 2013, profitable firms, and previous debt holders.
- Despite prior borrowing experience, the credit search and application process takes a lot of time. Prospective borrowers report spending an average of twenty-four hours applying for credit.
- The most sought after product was a line of credit, followed by loans and credit cards.
There is strong demand for small loans and business expansion was the primary motivation.
- More than half of applicants sought $100,000 or less in credit.
- Nearly forty percent of those borrowers seeking credit reported the primary purpose was to expand their business—expansion was the #1 reason for borrowing across all revenue segments.
- Approximately 1/3 of all firms report that financing costs increased over the last twelve months.
Successful applicants have prior borrowing experience and tend to be profitable and larger. It continues to be a difficult credit market for the smallest firms and startups.
- Successful borrowers are more likely to be older, larger (in employees and revenues), and profitable.
- A majority of small firms (under $1 million in annual revenues) and startups (under five years in business) were unable to secure any credit.
Large banks are a dominant credit source, but the use of online lenders is relatively common across firm segments.
- Small businesses primarily turn to large national and regional banks for financing.
- Almost twenty percent of applicants sought credit from an online lender in the first half of 2014.
- Approval rates were highest at large and small regional banks and online lenders. Of firms that applied to a small regional or community bank, sixty percent were approved for at least some of the financing sought.
However, the forty percent of firms that were not approved for credit are often denied because of their business credit history or credit score of the applicant. Small business loans for bad credit applicants are gaining popularity since the recent economic downturn in order to enable growing businesses to continue to meet demand.