Although they are a huge part of what makes our local communities survive, the business owners and entrepreneurs on Main Street don’t always get a chance to shine in the spotlight. They are responsible for providing jobs to every three out of four people and about half of our own neighbors. According to Maria Contreras-Sweet, administrator of the Small Business Administration, 7 million of the 10.9 million jobs added since the Great Recession were created by small businesses and startups. Still, it’s very challenging and also very unlikely for a business investor to invest in smaller businesses. Therefore, owners tend to rely on personal wealth or rented capital.
Traditional Banking is Dead
During the recession, many alternative financing options for small business owners dried up, and when the economy began to bounce back, banks increased loans to large businesses but stepped back from financing the smaller ones.
Small business owners can’t afford to do business in the same way they were doing it 10 years ago and stay relevant in the market. The ranks of community bankers has weakened within the past 10 to 15 years, despite the role they would play in their communities in partnership with Main Street enterprises. Unfortunately, for both, regulations and restrictions have affected small business credit, making it difficult for bankers to continue helping small businesses with funding.
For the first time in six months, small business loan approvals at big banks dropped from 20.6 percent to 20.4 percent in October. However, despite the small drop in approval rates, big bank financing for small businesses has increased nearly 20 percent in comparison to November 2013 when the economy was spiraling from the government shutdown.
Of course, traditional banking may not be completely off the table, but it doesn’t work for everyone. There are other options more feasible for small business owners.
In November, nearly 60 percent (59.7 percent to be exact) of funding requests for small businesses were granted in the institutional lending market – insurance companies, family funds, hedge funds, other non-bank financial institutions looking for high-yield investments. These lenders have substantial resources to invest in growing companies, and since January 2014, the approval rates have only increased from month to month.
Alternative lenders don’t require business owners to have a flawless credit background. Other factors that indicate a healthy business play a role in finance approvals.
Companies like Business Financial Services offer small business loans that are customizable to the owner and company’s needs. For example, short-term loans would be valuable for young companies that are unable to obtain a business loan from a bank or secure a line of credit and need capital available within days. This would allow a smaller company to start building credit, making it possible and easier to access more capital later on.
Another option we provide are merchant cash advances. This option is flexible and involves very few to no credit requirements.
According to president of PayNet, Bill Phelan, non-bank loan providers have grown 100 percent since last year. This may be due to the fact that alternative lenders offer much quicker turnarounds and a more personalized experience.
Small business adviser Mike Periu said, “Small business owners need to carefully evaluate lending options and understand that not all lenders are created equal. It’s up to the borrower to do their homework.”
Going into 2015, the economy is improving as small businesses continue to grow and provide jobs to people. While big banks may shy away from financing small companies, it does not mean they are no longer an option. However, there are more likely alternatives to pursue. Researching and understanding regulations specific to the institution, company and region before borrowing capital is important to remember.