Small businesses’ demand for financing hit a seven-year high in Q3 according to the recent Private Capital Access (PCA) Index. The survey, conducted by Pepperdine Graziadio Business School with the support of Dun & Bradstreet, highlights both small business behavior over the last quarter and trends in small businesses’ access to capital since 2012.
Trends in Small Business Access to Capital
Primary sources of credit for small businesses have shifted over the years, as technology and social trends have shaped the marketplace. For instance, since Q1 of 2015, respondents who source financing from large and community banks rose 3% each overall. Online lenders as a primary source for financing is up 5% overall since 2015. Since 2012, crowdfunding attempts are up 12% and the crowdfunding success rate is up 9%.
With rapid advances in the fintech and social media fields, these sources of financing have become much more accessible to business owners and have become a viable option as they continue to struggle to secure financing through traditional institutions. However, financing success rates using personal and business credit cards are down 9% each overall.
A noteworthy contrast in this quarter’s report is that 56% of respondents reported that they expected raising debt financing to be difficult, yet 68% expect to pursue a traditional bank loan within the next six months. In the prior three months, 45.4% have attempted to secure a bank loan, with a success rate of 31%.
Respondents have the most confidence in their ability to secure financing through trade credit, which allows businesses to receive goods or services in exchange for a promise to pay the supplier later (within a set period of time). Many small businesses use these lines of credit to maintain cash flow for their business, and when leveraged correctly, these transactions can help strengthen trust and relationships between businesses. Having a well-established business credit file can help prove to suppliers that a business has a history of paying bills on time and is more likely to follow through on repaying a line of credit.
Economic Impacts to Small Businesses
Respondents’ perception of the difficulty of raising debt financing has been trending down since Q2 of 2012, but there was a sharp increase at the beginning of 2019. If we look at respondents’ success rate in securing debt financing through bank loans, it reached an all-time high in Q1 of 2019 and has been trending downward throughout the year. The Federal Reserve lowering the interest rate in 2019 may have increased demand for loans, which could result in a higher amount of rejections. Small businesses may need to boost their creditworthiness to compete among a higher number of applicants.
The latest PCA Index revealed some interesting data about the needs and behavior of small businesses over the last quarter. There was a strong need to refinance existing debt compared to last quarter, with 49.7% of respondents noting their need was high or extremely high (compared to 37.3% saying so in the previous quarter). This could suggest that small businesses are struggling with more debt than they can afford or simply that they want to take advantage of the lower interest rates.
Sixty percent of respondents feel that the current financing environment is restricting opportunities for their business’s growth. In fact, the majority of respondents (33%) stated that lack of access to capital was preventing them from hiring in Q3. The second-biggest group (17%) said it was economic uncertainty (down 11% from the previous quarter); 18% of respondents indicated they anticipate a potential recession.
For respondents without plans to raise financing within the next six months, worries of a weak economy have decreased 15% overall since Q2 of 2012. Respondents citing economic uncertainty as a reason for not hiring new employees have decreased 10% overall since Q2 of 2015. The number of respondents citing government regulations and taxes as a reason for not hiring is down 15% overall since 2015. Respondents citing consumer demand as a concern preventing them from hiring is also down 10% overall since 2015.