Entrepreneurs looking to start new businesses have plenty of challenges to overcome. One of the toughest is likely securing funding. Small business lending in the US has struggled to regain footing since the economic downturn. However, though there have been signs of loan approval rates strengthening, many experts fear that small business owners will still find financing hard to come by in 2013.
Big banks, such as Wells Fargo and Chase, approved nearly 15 percent of all small business loan applications in December, according to the Biz2Credit Small Business Lending Index. It was the highest approval rating recorded by the index, which has been tracking the state of small business lending since 2011. It also was a 13 percent jump from November’s approval rates and a big improvement from the 9.7 percent figure of December 2011.
While the nation’s largest banks seem to be loosening their purse strings, their small business loan approvals are still nowhere near prerecession rates, which were about 46 percent. In order to secure a small business loan, most banks require two to three years of financial statements, which automatically puts startup businesses at a disadvantage.
Many big banks happily lend to those with good credit, collateral, and cash flow. But not everyone looking to start a business fits into that category. As a result, a growing number of entrepreneurs are turning to alternative lenders that offer cash advances. These lenders typically charge high fees and annual interest rates of 20%-60%, but they don’t stick to stringent credit checks or other traditional criteria for loan approvals. But with few options small businesses are desperate and alternative lenders fill a niche by providing quick, small loans.
Many alternative lenders, such as Kabbage, IOU Central, and AdvanceMe, allow business owners to fill out applications online and then utilize software in order to make rather quick loan decisions. Most of those loans range from $50,000 to $150,000.
Other nontraditional financing methods offered by crowdfunding sites, such as Kickstarter and GoFundMe, have gained some traction but have yet to receive widespread success.
The best bet for small businesses remains small banks, which are more likely to lend to local entrepreneurs. Small banks approve nearly half of the small business loan applications they receive.
Credit unions, which are traditionally good sources for small business funding, have been limited due to federal lending caps. New legislation designed to promote credit union lending to small businesses is being pushed in Congress this year. The Small Business Lending Enhancement Act would allow credit unions to lend a higher percentage of its assets.
There are other indications that small business lending is strengthening. The US Small Business Administration (SBA) works each year to provide support to entrepreneurs, and in 2012 the agency backed more than $30 billion in loans to small businesses. It was the second-highest total in its history. The agency points to the high volume as a good sign that the economy is returning to health.
The country’s economy relies on the strength of small businesses. However, it has been a rough few years for such companies. Funding is the key to help them grow, and if access to capital becomes easier, this important segment of the economy will be able to thrive.