Small Business Trends & Strategies | Pepperdine PCA Index Q2 2019

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Small and Mid-Sized Businesses Increasingly Turn to Alternative Lenders

The Pepperdine Private Capital Access Index (PCA) is a quarterly indicator produced by Pepperdine Graziadio Business School with the support of Dun & Bradstreet. Where relevant, the survey responses were segmented into small (less than $5 million dollars in annual revenue) and mid-sized businesses (between $5 million to $100 million in annual revenue). Overall, the whole sample experienced lower financing success rates with most types of lending than in Q1. Yet, demand for and access to capital is up for small businesses in the second quarter of 2019. Thirty-six percent (36%) of small business respondents attempted to raise outside financing during the second quarter, up from 28% in Q1.

However, more small and mid-sized businesses say the current business-financing environment is restricting their opportunities for growth. Fifty-two percent (52%) of small business respondents felt their growth opportunities were limited (up from 47% in Q1), and 28% of mid-sized businesses felt the same limitation, up from 17%. Forty-seven percent (47%) of small businesses felt restricted in their ability to hire more employees (up from 44% in the first quarter), and 25% of mid-sized respondents felt similarly restricted (up from 12%).

Many small and medium-sized businesses are responding to these challenges in the capital marketplace by finding success with alternative lenders.

The Rise of Alternative Lending

The bank-loan success rate has decreased during the second quarter, with only 32% of small businesses reporting success securing bank-loan financing in Q2, down from 44% in Q1. Given the lower approval rate, it’s not surprising that bank loan requests are also down from the first quarter. 

On the other hand, the use of non-bank lending options is on the rise. More businesses in the sample sought “alternative funding options” in the second quarter. For example: 

  • Business credit cards: 53% in Q2 (up from 42% in Q1)
  • Crowdfunding: 20% in Q2 (up from 14% in Q1)
  • Online lenders: 29% in Q2 (up from 20% in Q1)
  • Factoring: 16% in Q2 (up from 11% in Q1)
  • Merchant cash advance: 15% in Q2 (up from 12% in Q1)

This rise in demand for non-bank funding could indicate a number of things: a general increase in the sophistication of alternative lending options (which would make them more attractive), an increase in the number of start-up businesses (who lack the credit history to apply for a traditional loan), or simply that business owners are frustrated with the red tape that prevents them from acquiring the capital they need. While the PCA Index doesn’t suggest a definitive cause for the surge in alternative lending, it does suggest that business owners have options when it comes to obtaining capital and improving their companies’ cash flow.

Were You Denied a Loan? Here’s What to Do

Getting denied for a loan as a small business is fairly common. But don’t be discouraged. A rejection is simply a signal that changes need to be made in order to acquire financing down the road. These tips can help you be more successful in your next attempt: 

  1. Find out why you were denied. Lenders are required by law to provide a reason in writing as to why you were denied a loan.
  2. Make improvements to your business credit scores and ratings and try again. Other areas of contention when evaluating a business for a loan are the business’s capacity to make loan payments and how much of your own capital you’ve invested in your business.
  3. Consider waiting six months to a year before re-applying, if possible. If the length of your credit history or the age of your business was an issue with your first application, the solution could be simply giving it more time.
  4. Evaluate your alternatives. More than half of small business respondents had success with business credit cards in Q2 of 2019. Crowdfunding and borrowing from online lenders were also good options.

Being denied for a loan is not an impossible obstacle to overcome for your small business. There are many ways you can improve your approach to the lending process to become more attractive to banks, and in the short term, there are other options available for business financing.

For more trends and strategies for small business, view the full report here:

Read Q2 2019 PCA Index