This Month, a New Financing Crisis for Small Businesses

Since a lot of folks (primarily policymakers) seem to think that small businesses don’t need anything at all but access to debt financing in order to thrive, it’s interesting that we have a couple of highly relevant bits of nongovernmental research on the subject this month.

But, if all small business owners need is access to debt financing, then it looks like we might be in trouble.

Financing, From a Slightly Different Angle

MultiFunding’s National Lending Snapshot for the first quarter of this year finds what it calls a “national collateral crisis” underway. According to its findings, MultiFunding divided small businesses into three groups: A) Asset-Rich Borrowers (31 percent of small businesses, in this survey), B) Moderate Borrowers (47 percent), and C) Non-Lendable Borrowers (15 percent).

The A borrowers should have no trouble getting bank financing and getting great rates, because they not only have the credit rating and the cash flow, they also have assets with which to secure loans.

The B borrowers have the credit and the cash flow, but they lack collateral and would have to turn to alternative lenders (factoring, unsecured loans with higher rates, friends and family, etc.).

The non-lendable borrowers, or C borrowers, are just what they sound like. Their only option would be microlenders and, even then, the amount they could borrow would be severely limited (most microlenders cap loans at $35,000 to $50,000).

MicroFunding concludes that we are facing a collateral crisis among small business owners. The challenge is particularly acute among small businesses earning less than $1 million in annual income but, no matter how you slice it, this survey suggests that a whopping 62 percent of small business owners would be unable to qualify for a bank loan right now (and only 20 percent would qualify for an SBA loan).

“Research showed that, in today’s economy, collateral is a key factor in determining interest rates. Credit and cash flow, previously important in assessing a small businesses’ credibility, have taken a backseat to equity in their balance sheet.”

Buyer Beware

A new study by the Pew Charitable Trusts has found that American households receive more than 10 million offers per month for business credit cards, and the majority of those cards have “potentially harmful terms that would not be legal on those labeled for consumer use.” That’s because consumer credit cards fall under the jurisdiction of the Credit CARD Act of 2009, while business credit cards (the primary form of financing available to most microbusinesses) remain unprotected.

(I know you’re busy but, if ever there’s a reason to contact your Congressional representatives, this is it. Make a quick call, drop a brief letter, let them know how this can affect you. Your voice really does make a difference!)

On a Lighter Note …

Looking forward to your summer vacation? According to a survey released by American Express OPEN in May, you are in a slight minority if you plan to take a break this summer. Fewer than half (46 percent) of small business owners are planning summer vacations this year.

Of course, they didn’t ask how many of us are planning fall vacations or year-end holiday vacation. (I usually take my break during the last two weeks of the year.) So this might not present us with a completely accurate picture of the small business vacationing public. But it’s still interesting.

Those small business owners who plan to pass on the summer vacation this year say they’re too busy to get away (37 percent) or cite affordability (29 percent) as the top reasons they’re not vacationing. Those who do get away still worry about the kind of service their customers are getting (33 percent) and about missing attractive business opportunities when they are on vacation (24 percent).

Of course, another 40 percent don’t worry about anything at all. Then again, 68 percent of them are checking in while on vacation, and almost half of them (49 percent) check in at least once a day.

Which goes to show that, even on vacation, it’s tough for small business owners to really relax and get away from it all.

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Dawn R. Rivers Dawn R. Rivers, an award-winning small business journalist, regularly reports and analyzes small business policy and research as the publisher of the MicroEnterprise Journal. She also publishes research at the Microbusiness Research Institute and she blogs at The MicroEnterprise Journal Blog.

8 Reactions
  1. Very, very interesting post. I definately fall into the B borrowers. Fortunately, this year has been good to me and the business is growing well organically and with some minimal marketing spend. Btw, I came across this 247 press release review which may be handy for any new starts out there…

  2. This is just more evidence of what we’ve been saying for awhile, big banks are being stingy with loans to small businesses. That by itself is a problem, but add to that the increase in the number of small businesses starting up, and you end up with a real disparity. It’s no wonder businesses are being abused by credit cards, most individual consumers have become wary of credit cards, but small businesses don’t have many other options. If small business owners are diligent though, there are alternative sources of financing they can find that don’t depend on banks or credit cards.

  3. debts are continuously increasing and i don’t know how its going to end…

  4. Dawn R. Rivers

    Actually, big banks are being stingy with term loans for small businesses because they are soaking small business owners via credit cards instead. They make a lot more money from credit cards than they do from those loans, and they are lower dollar lines of credit making them less risky. Then, too, it seems that everybody on the policy side is prepared to talk about credit cards as if they were a legitimate form of business financing (or microfinancing), which masks a real need.

  5. I think there are a lot of credit worthy businesses out there who have decided not to make any capital investments until a full recovery has been achieved. If credit became a lot easier, the volume of loans probably would only increase by a small amount.

  6. Hi Dawn,

    It’s sad to see the financial situation prevailing these days. 62% is way too high for business owners to not qualify for loans, this can have adverse affects on the over all economy as these small businesses are the ones that do the most recruitment and contribute significantly to the economy. Hope things get better soon! Thanks for sharing.

    Riya Sam
    Training for

  7. Dawn R. Rivers

    @ Stephen, @ Riya

    Actually, if you step back and look at the overall economy, what small business owners are doing makes perfect sense. The real problem here is that (a) wages are growing more slowly than overall GDP, which puts a bit of a squeeze on disposable income and (b) ongoing instability in the housing market continues to depress home values, which adds to both the small business collateral problem and to general consumer jitters.

    The real key to the whole business is to heal the housing market. Right now, not enough people are talking about that.

    (I talk about this some in my latest podcast, which I just posted over at The Journal Blog, if you’re interested.)

  8. Hi Dawn

    Thanks for the great post I for one was never big on loans and I’ve manage to start two business without one. I advise anyone starting a small business to stay away from loans and credit cards as much as possible.

    Its already hard to create a viable business in this economy not to mention worrying about those crazy interest rates. I suggest entrepreneurs to take their time to plan research before committing to spending or launching their companies.

    With the many tools the web provides nowadays alot can be accomplish with little capital and much time spent on development and research.

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