Small Businesses are Receiving More Financing

The Federal Reserve just released a report documenting financing results for small businesses in 2015, indicating that approval rates for small businesses had gone up compared to 2014 levels.

The Role of Small Businesses

Small businesses have had a hard time since the financial crisis in 2008, as small firms depend more on access to financial capital from banks to fund their growth.  When credit dries up, the boost businesses receive from the credit markets slows and accelerates the economic downturn.  It’s important to remember, small businesses create two out of every three net new jobs and employ half of the private sector workforce according to Harvard Business School.  During the post-2008 economic recovery, small business lending took a long time to recover as lending rates declined 20% causing small business loans to drop from composing half of all loan volume to below 30%.  This credit crisis has slowed the recovery of an integral part of the economy.

Small Business Lending Comeback

The Federal Reserve’s credit survey for 2015 showed that financing rates for small businesses have been improving, with 79% of firms reporting being approved for some financing, and 50% being approved for all their financing needs. It seems that small banks are picking up a lot of the slack left by big banks reducing their lending volume to small businesses.  Small banks have 18% higher approval rates than big banks for small business loans, earning a customer satisfaction rating of 75 compared to a rating of 51 for large banks. 

Still a Long Way to Go

Unfortunately, the full financing needs of small businesses are not being met.  Business owners continue to report that managing cash flow is one of their top business challenges.  50% of financing applicants in 2015 had a shortfall in the amount of money they received, reporting that an insufficient credit history and collateral were the main reasons only part of their request was met.  Both large and small banks will have to increase their lending volume to meet the demands of American businesses.

Who Businesses are Turning to For Financing

Under these new conditions, small businesses are turning elsewhere to meet their financing needs.  20% of employer firms applied to online lenders, who have been lending money out with approval rates of 71%.  However, the satisfaction score they received from the businesses they lend to was only 15, much less than that of small and big banks.  Other businesses turn to credit cards for any financing needs.  The best place for small businesses to go to for any of their funding needs remains small banks, however, as they boast the highest approval rates, satisfaction ratings, and transparency ratings of any of the options.