According to the 2016 Small Business Credit Survey, which was conducted by the Cleveland and Richmond Federal Reserve Banks, larger businesses have a higher chance of securing financing in comparison to microbusinesses (categorized as nonemployer firms and small firms under four employees). As a result, these microbusinesses are depending on the owners’ personal finances in order to secure funding or seeking out alternative lenders and online lending companies to meet their capital needs. Thus, it comes as no surprise that approximately four in five microbusinesses with financial issues used personal funds to tackle their challenges.
The survey, which included over 10,000 small business owners, analyzed small firm financial health in all 50 states and Washington D.C. based on the following criteria: business owners profitability (as of year-end of 2015), low credit risk and used retained earnings. The study discovered the following insights:
- Only thirty percent of business owners met all three criteria.
- Ten-percent of business owners did not meet any of the criteria.
- Thirty-three percent met two out of the three criteria.
- Twenty-seven percent met one out of the three criteria.
Although, these small firms are creating jobs (microbusinesses account for about 9 in 10 firms and about 34.9 million jobs in the United States) they are struggling to secure loans. These micorbusinesses are less profitable in comparison to larger employers and often face more financial challenges. According to the survey above, out of the forty-five percent of small businesses that applied for loans, only eight-teen percent received the entire sum requested, six-teen percent received some and ten percent received none. Moreover, fifty-five percent of small businesses did not apply for loans due to the following reasons: twenty-four percent had sufficient financing, four-teen percent were debt averse, nine percent were discouraged, and eight percent had other reasons.
In a related study about Small Business Finance, according to the Federal Reserve, 82% of small employer firms were approved for financing, but only 50% received the full amount requested. Further, businesses are often discouraged from applying for additional credit due to an expectation that they will be turned down.
According to an article published on Small Business Trends, “of the loan applications made in the 12 months leading up to the Small Business Credit Survey, just thirty percent of microbusinesses applied for funding compared with fifty percent of larger businesses. Seventy-two percent of microbusinesses that applied for financing requested amounts under $100,000”.
As microbusinesses are more likely to have their financing request rejected from the banks, small businesses and small business owners are changing their financing approach. We are currently seeing a great deal of small business owners turning to alternative lenders in order to expand their businesses and less loan applications from traditional financial institutions. Alternative lenders can often approve loan requests in as quick as 24 hours at rates that can be more competitive than traditional lenders.