A study has confirmed something many small business owners know from painful experience: The much-ballyhooed capital crunch is hampering small businesses’ ability to expand.
The Pepperdine University Private Markets Capital Project surveyed 559 privately held businesses and 1,430 lenders and investors nationwide and found that, although the majority (78 percent) of businesses had solid growth strategies, only 40 percent had access to the resources they needed to grow.
“The study shows private business owners feel they are being constrained by access to financial capital,” said survey author John Paglia. “Owners currently expect a 10 percent revenue growth over the next 12 months. If they were to receive additional capital, they estimate their revenue growth rate to jump to 25 percent.”
The survey by Paglia, a finance professor at Pepperdine University’s Graziadio School of Business and Management, is unique because he interviewed alternative lenders, such as venture capitalists and private equity firms. Most surveys like this focus on one type of capital (such as banks or angel investors).
Here are some of Paglia’s findings:
- Lenders and investors reject 90 percent of loan applications or investment proposals that would be secured by a business’s real estate holdings.
- They reject 73 percent of loan applications or investment proposals that are based on a business’s cash flow.
Where are businesses getting money?
- Slightly more than 50 percent of business owners surveyed had obtained capital from friends and family for money.
- One-third had obtained bank loans.
- Approximately 10 percent had obtained financing from alternative lenders.
One worrisome finding: Despite their frustrations, most business owners are significantly more optimistic than actual conditions warrant, Paglia told the Los Angeles Times. This could prompt them to take unnecessary risks, and might mean that small businesses are in worse shape than previously thought.
Read more about the survey and get the full report at the Pepperdine University website.
My take is this: When you feel constrained by lack of capital from traditional sources, it’s time to look at non-traditional sources more closely. Look at how you can use a charge card in place of a line of credit; factor in your invoices; study grant and loan programs from your local economic development organizations; check out credit unions instead of banks for loans; and finally, look for trade terms that will give you extra time to pay. Leave no stone unturned.
Editor’s Note: This article was previously published at OPENForum.com under the title: “Capital Crunch Hurting Expansion Plans: Study Shows.” It is republished here with permission.
I read about the Fed’s push to get $40 billion out to small businesses…but someone from Entrepreneur (their name escapes me at the moment) asked if the money should be given to banks, VC’s, or business incubators?
I opted for business incubators. Because banks though they have money are hesitant to lend to startups (as you just said), and VC’s are busy looking for the next Facebook or Twitter. And least with business incubators startups have a better chance or acquiring capital and training along with that capital.
Just my thoughts…but great post! 🙂
You can add my small business to this mix. We have a chain of six indoor tanning salons that will top 2008 numbers by 200% and 2009 numbers by another 55%, yet getting funds to expand has been impossible. Our demand to expand into surrounding areas like Tampa continues to grow, as does our customers frustration for the stalled growth.
We will be expanding to a seventh location in December, however that was a deal I had to structure in-house or it would not have come to fruition. I have another in-house funded expansion project underway in the spray tanning market, a business we have 7 years experience in and see 400% growth in over the last two years. That project halted by no cash flow, as it sits 80% complete. The GMROI on the spray tan business will be much greater, but it needs to get off the ground before the tanning season kicks into full swing.
In short the inability to secure $400-$600k will end up with a potential loss 3x greater then the investment amount.
And such is the life of a small business owner.
Trey Markel Business Loans
This is so true. Small business owners and entrepreneurs are seeing tighter lending guidelines in all sectors. The days of low doc or no doc underwriting guidelines are over.
Small business owners need to start becoming credible in the eyes of the small business community. When I say credible, I mean everything. With the amount of due diligence that is going on right now, business owners can leave anything unchecked. The question is, “Is your business credible or questionable?”
There is little doubt these are challenging times for the small business owner. The good side is that those who succeed could do very well.
Great point Anita. What are some of those non-traditional sources of financing that SMBs should be looking into?
Anita: Could please mention a couple more alternative ways of getting money? How big is the factoring industry in USA?
Another great article Anita–your suggestion to leave no stone unturned is the only path an Entrepreneur can follow to find the capital they need to grow their business.
We have been working with a number of fast-growing (yes, they are out there!)businesses that are profitable and were turned down by banks over the past 18 months. They have truly struggled like never before.
Asset Based Lending is putting capital on their balance sheets when the banks simply won’t do it.
Holly Magister, CPA, CFP
Enjoyed the article and Extreme John thanks for sharing and making it real. I hear stories like this all the time.
Martin, factoring is a $140 billion industry that has been around for 4,000 years (no exaggeration. That’s a fact!)
Darlene Friedman, CPA
Great article. I see that a number of readers are looking for other alternative lending sources. They should check out PAYgrow Payroll Financing at http://www.fourpointcapital.com. PAYgrow deflects the challenges that arise from diminished credit availability and changes in lending practices and provides capital by allowing businesses to fund its payroll on terms, turning a normal, predictable expense into a source of cash. Goal is to help small businesses to increase working capital, improve cash flow, and take advantage of growth opportunities.