The State of Small Business Borrowing

The Fed released the results from its 2017 survey of small businesses, and Cornerstone's commercial banking experts Joel Pruis and Joe Ganzelli weighed in on what the survey results mean. The study found that:

Demand for financing fell, with 40% of companies seeking funding, down from 45% a year earlier.
Joel: "This is fairly typical as the old rule of thumb is that half to 2/3 of all small businesses simply don’t borrow or use credit so this metric is in line with the norm."

64% reported they had financial challenges.
Joe: "Two-thirds of this 64% did NOT seek business financing but instead relied on personal funds, which is noteworthy. Why? Their perception of tight credit, or their business’ lack of credit worthiness, contributed to their financial challenges."
Joel: "There is no capital planning for small businesses.  The personal checkbook is the same as the business checkbook--it's all the owner’s money so they should expect to put money back into the business periodically. Sometimes this is only short term, but the challenge--and opportunity for bankss--is when the funding is more permanent."

40% said paying operating expenses was a challenge.
Joel: "This is a problem when the business is not growing or is in the start up phase. Operating expenses are a challenge if the business is growing and has a building balance of accounts receivables.  Business is profitable but is funding the growing expenses and has to wait for the cash to come in from the customers.  This is a great financing opportunity for banks."

30% said it was difficult to get credit.
Joel: "This may be an expression of both the ability to actual get approved andthe difficult loan process by most banks for small businesses.  The difficult process would involve: 1) Requiring too much information relative to the size of the credit request (asking for 3 years personal and business tax returns for a $50k line of credit) which many small business owners would find it difficult to submit all the paper, and 2) Asking small business owners to meet with a banker during the small business' primary operating hours--i.e., during prime income-producing times for the business."
Joe: "Banks should be aware of these borrower perceptions and attempt to address them upfront in some fashion where possible (e.g., business credit card offerings, SBA vehicles, liquid collateral secured or payment reserve products for borrowers that require them, etc.)."

48% sought loans from large banks, 47% from small banks, 24% from online lenders. As a point of comparison, in 2015, the %s were 42% from large banks, 52% from small banks, and 20% from online lenders.
Joel: "If you break down the percentages here, 1 out of four businesses applying for credit did so via an online application. This was unheard of 5+ years ago. It means small business owners are comfortable with online applications and like that it's available 24/7 so the small business owner can apply when he/she has the time versus the small business owner being forced to work when it is convenient with the bank."
Joe: "Large banks and online lenders realized increases at the expense of small banks, likely attributable to delivery speed and more diverse product."

More businesses were successful in obtaining financing than in 2016, with 46% versus 40% getting approvals. In addition, 58% of loan and credit applications were successful, getting all the funds they requested, up from 53% in 2016.
"This contradicts the 1st and 3rd bullets, which could point to borrowers' perceptions regarding the difficulty in obtaining credit versus a tightening of lenders' credit standards."
Joel: "This is another big stat.  Banks are getting more aggressive in pursuing small business financing, which is reflected in the increase in the percentage of small businesses that applied with large banks between 2015 and 2017."

Ron Shevlin
Director of Research
Cornerstone Advisors