Capital is an indispensable resource throughout all stages of a business, but access to said capital is not always possible. This is especially the case for small businesses, which leads owners to look for alternative lenders when they need funds.
Q2 2019 Private Capital Access Index
According to the Q2 2019 Private Capital Access Index (PCA Index) from Dun & Bradstreet and Pepperdine Graziadio Business School, alternative lending by small and mid-sized businesses is on the rise. This supports another data point from the index which says there is lower financing success rate with most types of lending than in the first quarter.
As the index points out, small business demand for and access to capital is up in the second quarter. If a small business needs capital and traditional lenders are not delivering, owners will seek the funds from alternative sources.
Alternative Lending on the Rise
In Q2 of 2019, the success rate of small businesses seeking bank loans decreased. Only 32% of small businesses reported securing financing from a bank loan. This was down from 44% of the first quarter.
Not surprisingly the lower approval rates are responsible for fewer people applying for loans in banking institutions. And this has increased the use of non-bank lending or alternative funding options.
Amber Colley, Business Credit Expert and Senior Vice President, Dun & Bradstreet, says this rise may indicate several things.
Colley goes on to say it could be, “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.”
So, what are the alternative sources?
Business credit cards are on top of the list as 53% of businesses say they use it to get the funds they need. This is up by 11 percentage points from the first quarter.
A business credit card is a reliable source of financing, but if the debt is not managed properly it can be problematic.
Online lenders are next, with 29% of the respondents stating they use this type of financing for their business. And just like credit cards, the online lending environment has to be approached with caution. Make sure to thoroughly vet the lender and contract before you sign any documents.
Although relatively new, 20% of businesses say they use crowdfunding to get financing, which is up from 14% in Q1. Factoring is next at 16% and merchant cash advance is at 15%, up 3% from the first quarter.
What to do if you are Denied a Loan?
First, it is important to not get down on yourself when a lender doesn’t approve your loan. As Colley says, “A rejection is simply a signal that changes need to be made in order to acquire financing down the road.”
To that end, she provides some tips to help you with your next application.
- 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.
- 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.
- 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.
- 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.
About the Q2 2019 Private Capital Access Index Report
The Q2 2019 Private Capital Access Index report comes from a survey of 848 completed responses gathered between April 8 to May 17, 2019.
You can download the latest index report here (PDF).