If you’ve been reading the papers over the last four or five years, you already know how the small business lending narrative has unfolded. Practically every quarter brought worse news than the previous one: Business credit was tightening; banks were refusing to lend to all but top-tier businesses, etc. And although we’ve seen modest upturns in bank lending, a lot of this narrative continues. And the subtext has been clear all along:
Don’t even think about it, Mr. Small Business. Your chances of getting a bank loan are slim to none.
Don’t get us wrong—when the banks’ business credit pipeline dried up, it hurt a lot of small businesses and the economy overall. But while policymakers, pundits and business owners were all wringing their hands, a new narrative—pro-small business, encouraging and optimistic—was quietly taking shape. This new narrative, based on a new reality, had to do with alternative sources of capital and the success many small businesses were having in obtaining funding from them. Today, these sources have gained so much momentum that to many, they’re no longer considered “alternative.”
We should know. While this is an overarching industry narrative, this is our story, too, at BFS Capital. And our story is really all about small and medium-sized businesses: Helping them get the capital they need to grow and thrive.
The Federal Reserve Bank of Chicago describes the central role that small businesses play in the U.S. economy. Nationwide in the U.S. over the past 15 years, small businesses generated 64 percent of the net new job growth. Small businesses with fewer than 500 employees represent 99.7 percent of all employer firms and employ more than half of private sector employees in the U.S., while firms with fewer than 50 employees represent 95 percent of all employer firms.
Despite this, large bank lending to small businesses fell by more than 50 percent since the recession began in late 2007. “Non-bank organizations,” it says are “anti-recessionary,” in that they become viable alternatives when banks tighten lending standards. These non-banks are viewed as “complementary” when credit is scarce.
But QSR Magazine, a publication for the quick-service restaurant industry, provides an updated version of this scenario and says that the Great Recession changed the financing landscape forever. “Alternative,” non-bank lenders, not so alternative any longer and have taken their place at the table alongside banks, who still lend far less to small businesses than they did pre-Recession. The bottom line is that this altered lending landscape benefits small businesses: The more sources of capital available to them, the better.
Earlier this summer, the U.S. Department of the Treasury and the SBA co-hosted the third annual Capital Access Innovation Summit to explore opportunities to strengthen capital formation for both startups and small businesses. Needless to say, we were gratified to find that “innovative financing models…providing short-term working capital to small and mid-size businesses” were acknowledged by keynote U.S. Treasury Secretary Jack Lew as legitimate funding sources. This represents a major shift for lenders like us who have historically been regarded with a certain amount of skepticism.
It’s estimated that our “alternative-turned-mainstream” industry has pumped around $7.5 billion into American small businesses over the past 10 years—and perhaps as much as $1.5 billion in 2012 alone. Some predict that this number could top $3 billion by the end of this year!
We at BFS Capital are proud to be at the leading edge of what is truly a business credit/capital revolution. Sure, a bank might lend to your business if and only if you are amongst the most creditworthy. Of course, you’ll probably wait weeks or months for an approval and for the loan to be funded.
But our experience demonstrates that there are thousands of well-run businesses that need money for growth opportunities that either don’t meet a bank’s standards or need the money more quickly than banks can respond. These are the businesses we serve—the reason we’re here—and that are the backbone of the U.S. economy as we all move forward.
Image courtesy of Stuart Miles / FreeDigitalPhotos.net