Are Small Business Credit Needs Shifting?

Over the past several years, many small businesses across the country have tried to obtain financing from a lender but found the process to be difficult and frustrating. Conditions are loosening in this regard these days, but the question is just how much demand there is for that type of credit among independent companies.

Today, the vast majority of small businesses across the country believe that they did not have any particularly large demand for credit over the course of 2014, according to the latest Joint Small Business Credit Survey, a collaboration between the Federal Reserve Banks of New York, Atlanta, Cleveland and Philadelphia. For instance, only 18 percent of micro-businesses – those with less than $250,000 in annual revenue – felt they needed to take on a loan, compared with 32 percent of small companies and 31 percent of mid-size firms (defined as having between $250,000 and $1 million, and between $1 million and $10 million in annual revenues, respectively). By contrast, 58 percent of commercial businesses – those with more than $10 million in yearly revenues – felt the same way.

Interestingly, the need for credit seems to be tied to already having outstanding balances in a company’s name, the report said. Among small businesses, 60 percent of applicants for a loan had debt, compared to the 42 percent overall who reported carrying at least some. Meanwhile, only 49 percent of loan applicants were able to turn a profit, in comparison with about 3 in 5 of all companies surveyed.

What about success rate for applicants?
In addition, a large portion of companies continue to be rejected when they seek loans, the report said. In all, 44 percent are denied outright, and micro- and small businesses are the ones impacted most (at 52 and 50 percent, respectively). Meanwhile, only 25 percent and 36 percent of these companies, also respectively, were able to obtain all of the financing for which they applied, compared to 60 percent of mid-size firms and 70 percent of commercial companies.

Owners worried about their ability to qualify for some or all the financing they seek might want to consider ways to get their own shops in order first. For instance, cutting costs for things like small business insurance, including policies for liability insurance, could free up thousands of dollars. That, in turn, could be devoted to improving other aspects of a company and making it more attractive for lenders going forward.