Traditional banks approved just 27.7% of small business loans last year, sending more entrepreneurs to alternative funding sources.
These findings, published in a new report from funding platform Biz2Credit, make it clear that business owners face challenging times in the current economic environment.
The number of small business loan applications approved by banks has shrunk over the past year. What's worse is that other providers of capital are turning entrepreneurs away, too. Approvals by credit unions have sunk to an all-time low.
Even if a small business owner secures a loan, it rarely comes cheap as borrowing costs have risen. More than 40% of senior loan officers surveyed by the Federal Reserve in October reported increases in the cost of small business credit lines over the past few months, as well as higher premiums for riskier loans.
Funding is the lifeblood of any business. In the Fundbox U.S. Small Business Trends Survey conducted in 2022, 40% of small businesses reported they would have to shut down within two months if their cash flow dried up.
Navigating the lending landscape is difficult, yet small business financial advisors see potential pathways forward even during these challenging times. Determining an appropriate borrowing strategy can mean the difference between achieving profitability or closing up shop, so hiring experts familiar with the terrain increases the odds of success for business owners.
Best Foot Forward
Worsening borrowing conditions have hardly dented the appetite for capital among business owners. According to a Fed Small Business report, nearly half of all small businesses applied for a loan last year.
Meanwhile, according to the most recent Federal Reserve data, the average SBA loan was over half a million dollars. As the ancient saying attributed to Plautus goes, it takes money to make money. That is never truer for those desperately needing capital to get their business off the ground.
The ins and outs of the financing application process can be intimidating, especially for first-time entrepreneurs. This raises the stakes for their initial meeting with a banker.
“There is never a second chance to make a good first impression,” says Chris Wilbratte, CFP and Managing Partner of Echelon Financial. “To increase the odds of success for a loan approval, business owners need to have their financials in order.”
Wilbratte recommends keeping accurate accounting books and updating financial projections created along with a business plan on how you intend to deploy the loan proceeds to grow your business.
“Set a meeting with your banker to review your loan application, your business and personal financials, and your business plan,” says Wilbratte. “This meeting gives you an opportunity to ensure that you are providing everything the bank needs to review your proposal and also to present your case to ensure that your loan is approved.”
The good news for applicants is that more lending alternatives exist today than ever.
Emergent platforms like LendingClub, OnDeck, and Kabbage offer online loans with faster approval processes than traditional banks. There are also peer-to-peer funding communities like Prosper and Funding Circle that connect businesses with individual investors willing to lend money. As with any funding platform, business owners should remain cautious of additional costs — such as late payment penalties — that could increase the total loan balance.
“Consider diversifying your options by exploring Small Business Administration loans, which often offer favorable terms and lower down payments compared to traditional banks,” says Jason P. Berube, Founder of Cornerstone Wealth Consulting Services. “Research reputable online lenders and community banks tailored to small businesses, as they might be more flexible in their lending criteria.”
Stuck in a Jam
Access to funding is often a matter of survival for business owners. It can be tempting to ask friends for a financial lifeline to keep the doors open.
Borrowing from friends is an underreported habit of American business owners. A recent study by Finder.com estimated the total size of “friends and family debt” nationwide to be around $184 billion.
This may not be the ideal solution. A majority of those who lend to friends report suffering negative repercussions from engaging in personal loans. There may be ways to limit liabilities when taking this route.
“Borrowing from friends or family, or other options like refinancing from your mortgage, can be viable strategies,” says Berube. “However, it's crucial to approach such arrangements with transparency and a formal agreement. Clearly outline repayment terms, interest rates (if any), and potential risks. While these alternatives may provide initial capital, they require careful consideration to maintain healthy relationships and financial stability.”
Amid constricting small business credit, financial advisors for entrepreneurs can help evaluate alternative funding sources, from online platforms to peer-to-peer networks.
As the number of traditional loan approvals declines, the need for adaptability grows. While borrowing from friends or family provides a potential solution, transparent communication is vital.
Small businesses show strength by actively looking for money to help them grow. Dealing with these money challenges means they need to be flexible and use different strategies. This emphasizes how important it is to adapt and succeed despite economic challenges.