Credit Shortage Isn't Getting Any Easier For Small Businesses
Written by Ken Gaebler
New York Federal Reserve survey shines a spotlight on the borrowing challenges that continue to plague small businesses.
Lack of capital has become a familiar mantra in the small business community. But a recent poll by the Federal Reserve Bank of New York shows how difficult it is for small companies to secure funding and provides insights about the future of small business lending.
- Microloans. Microloans under $100,000 are the most sought after type of small business loan, accounting for 58% of small business borrowing. But they may also be in shortest supply compared to larger loans, primarily because the types of businesses that apply for microloans are financially weaker and less established than the companies that usually apply for large loans.
- Borrower Opt-Out. Large percentages of would-be borrowers are staying out of the credit market because they are discouraged about the odds of getting approved. Nearly half of prospective applicants did not apply based on the belief that they would be declined due to firm size, poor sales or other factors.
- Partial Credit Outcomes. Most businesses that applied for credit (63%) were able to receive some level of financing. But unfortunately, only 13% of applicants were financed for the full amount.
The process of getting business loans from banks has always been challenging for small companies. Regardless of the economy, entrepreneurs who are able to document a track record of profitability and can offer sufficient collateral are more likely to receive commercial financing than underfunded startup business owners.
Going forward, future demand for commercial lending is expected to come from the pool of applicants who weren't fully funded in 2011 and 2012 as well as applicants who decided not to apply. However, it may still be difficult for these businesses to receive financing, especially if their financial conditions and bank relationships haven't improved since the last go round.
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